o FIST1 P-2
SUPPLEMENT DATED JANUARY 1, 2000
TO THE PROSPECTUS OF
FRANKLIN INVESTORS SECURITIES TRUST
(FIST1 - FRANKLIN CONVERTIBLE SECURITIES FUND, FRANKLIN EQUITY INCOME FUND,
FRANKLIN GLOBAL GOVERNMENT INCOME FUND AND
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND)
DATED MARCH 1, 1999
The prospectus is amended as follows:
I. Under the "Goal and Strategies - Principal investments" discussion for
Franklin Convertible Securities Fund, the first paragraph on page 3 is
replaced with the following:
The fund may invest up to 100% of its total assets in securities that are
below investment grade. Investment grade securities are rated in one of the
top four ratings categories by independent rating organizations such as
Standard & Poor's Corporation (S&P) and Moody's Investors Service, Inc.
(Moody's). The fund will not invest more than 10% of its total assets in
securities rated below B by Moody's or S&P or unrated securities of
comparable quality. Generally, lower rated securities pay higher yields than
more highly rated securities to compensate investors for the higher risk.
II. Under the "Goal and Strategies - Principal investments" discussion for
Franklin Equity Income Fund, the second paragraph is replaced with the
following:
The fund may invest up to 35% of its net assets in other securities, such as
convertible securities, fixed-income securities, real estate investment
trusts (REITs), common stocks with current dividend yields at or below the
average dividend yield of the Standard & Poor's 500 Index, and foreign
securities, including depositary receipts. A convertible security is a
security, such as a fixed-income security or a preferred stock, that is
convertible into common stock. The fund does not intend to invest more than
15% of its assets in convertible securities or REITs.
III. The "Management" section for Franklin Short-Intermediate U.S. Government
Securities Fund is replaced with the following:
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $218 billion in assets.
The team responsible for the fund's management is:
JACK LEMEIN, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Lemein has been a manager of the fund since 1987 and has more than 30
years' experience in the securities industry.
ROGER BAYSTON CFA, SENIOR VICE PRESIDENT OF ADVISERS
Mr. Bayston has been a manager of the fund since December 1999. He joined
the Franklin Templeton Group in 1991.
T. ANTHONY COFFEY CFA, VICE PRESIDENT OF ADVISERS
Mr. Coffey has been a manager of the fund since December 1999. He joined the
Franklin Templeton Group in 1989.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended October 31, 1998, the fund
paid 0.56% of its average monthly net assets to the manager.
IV. The following sentence is added after the minimum investments table on
page 54:
Please note that you may only buy shares of a fund eligible for sale in your
state or jurisdiction.
V. In the Selling Shares table on page 60 the section "By Wire" is replaced
with the following:
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[Insert graphic of You can call or write to have redemption
three lightning proceeds sent to a bank account. See the
bolts] policies above for selling shares by mail or
phone.
BY ELECTRONIC FUNDS
TRANSFER (ACH) Before requesting to have redemption proceeds
sent to a bank account, please make sure we
have your bank account information on file. If
we do not have this information, you will need
to send written instructions with your bank's
name and address, a voided check or savings
account deposit slip, and a signature
guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
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VI. The sections "Waivers for investments from certain payments," "Waivers
for certain investors," "CDSC waivers" and "Retirement plans," on pages 51
through 53, are replaced with the following:
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class may be waived for certain redemptions
and distributions. If you would like information about available sales
charge waivers, call your investment representative or call Shareholder
Services at 1-800/632-2301. For information about retirement plans, you may
call Retirement Plan Services at 1-800/527-2020. A list of available sales
charge waivers also may be found in the Statement of Additional Information
(SAI).
VII. The section "Dealer compensation" on page 63 is replaced with the
following:
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CONVERTIBLE (Class A and C only) AND EQUITY FUNDS
CLASS A CLASS B CLASS C
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COMMISSION (%) - 4.00 2.00
Investment under $50,000 5.00 - -
$50,000 but under $100,000 3.75 - -
$100,000 but under $250,000 2.80 - -
$250,000 but under $500,000 2.00 - -
$500,000 but under $1 million 1.60 - -
$1 million or more up to 1.00 1 - -
12B-1 FEE TO DEALER 0.25 0.25 2 1.00 3
GLOBAL FUND
CLASS A CLASS C
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COMMISSION (%) - 2.00
Investment under $100,000 4.00 -
$100,000 but under $250,000 3.25 -
$250,000 but under $500,000 2.25 -
$500,000 but under $1 million 1.85 -
$1 million or more up to 0.75 1 -
12B-1 FEE TO DEALER 0.15 0.65 3
SHORT-INTERMEDIATE FUND
CLASS A
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COMMISSION (%) -
Investment under $100,000 2.00
$100,000 but under $250,000 1.50
$250,000 but under $500,000 1.00
$500,000 but under $1 million 0.85
$1 million or more up to 0.75 1
12B-1 FEE TO DEALER 0.10
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and on Class C NAV purchases. A dealer commission
of up to 0.25% may be paid on Class A NAV purchases by certain trust
companies and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.25% for the Convertible and
Equity Funds and 0.15% for the Global Fund during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
VIII. The section "Statements and reports" on page 61 is replaced with the
following:
STATEMENTS AND REPORTS You will receive quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement).
You also will receive the fund's financial reports every six months. To
reduce fund expenses, we try to identify related shareholders in a household
and send only one copy of the financial reports. If you need additional
copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive copies of all notifications and
statements and other information about your account directly from the fund.
Please keep this supplement for future reference.
FRANKLIN INVESTORS
SECURITIES TRUST
FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS A & C
FRANKLIN EQUITY INCOME FUND - CLASS A, B & C
FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS A & C
FRANKLIN SHORT-INTERMEDIATE
U.S. GOVERNMENT SECURITIES FUND - CLASS A
STATEMENT OF
ADDITIONAL INFORMATION
MARCH 1, 1999, AS AMENDED JANUARY 1, 2000
[Insert Franklin Templeton Ben Head]
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the fund's prospectus. The fund's
prospectus, dated March 1, 1999, which we may amend from time to time, contains
the basic information you should know before investing in the fund. You should
read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended October 31, 1998, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies 2
Risks 20
Officers and Trustees 26
Management and Other Services 30
Portfolio Transactions 32
Distributions and Taxes 33
Organization, Voting Rights and
Principal Holders 35
Buying and Selling Shares 36
Pricing Shares 44
The Underwriter 45
Performance 47
Miscellaneous Information 50
Description of Bond Ratings 51
[Begin callout]
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF
THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
[End callout]
GOALS AND STRATEGIES
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The Convertible Fund's investment goal is to maximize total return, consistent
with reasonable risk, by seeking to optimize capital appreciation and high
current income under varying market conditions.
The Equity Income Fund's investment goal is to maximize total return through
emphasis on high current income and long-term capital appreciation, consistent
with reasonable risk.
The Global Fund's investment goal is to provide high current income, consistent
with preservation of capital, with capital appreciation as a secondary
consideration.
The Short-Intermediate Fund's investment goal is to provide as high a level of
current income as is consistent with prudent investing while seeking
preservation of shareholders' capital.
These goals are fundamental, which means they may not be changed without
shareholder approval.
CONVERTIBLE FUND
The fund pursues its investment objective by investing at least 65% of its net
assets (except when maintaining a temporary defensive position) in convertible
securities as described below, and common stock received upon conversion or
exchange of such securities and retained in the fund's portfolio to permit their
orderly disposition. The fund's policies permit investment in convertible and
fixed-income securities without restrictions as to a specified range of
maturities.
The fund may invest up to 35% of its net assets in other securities
(nonconvertible equity securities and corporate bonds, covered call options and
put options, securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements collateralized by U.S.
government securities, money market securities, and securities of foreign
issuers), which, in the aggregate, the fund considers to be consistent with its
investment objective. The fund limits its investments in warrants, valued at the
lower of cost or market, to 5% of the fund's net assets, or to warrants attached
to securities.
CONCENTRATION The fund will not invest more than 25% of its net assets in any
particular industry. This limitation does not apply to U.S. government
securities and repurchase agreements secured by such government securities or
obligations.
EQUITY FUND
The fund pursues its investment objective by investing at least 65% of its net
assets (except when maintaining a temporary defensive position) in a broadly
diversified portfolio of common stocks offering current dividend yields above
the average of the market defined by the Standard & Poor's(R) 500 Index. The
fund may invest up to 35% of its net assets in other securities that, in the
aggregate, it considers to be consistent with its investment objective. Other
investments may include preferred stocks and fixed-income securities convertible
into common stocks, securities of foreign issuers, real estate investment trusts
(REITs), U.S. government securities, corporate bonds, high grade commercial
paper, bankers' acceptances, other short-term instruments, covered call options,
and put options.
The fund's emphasis on a stock's current dividend yield is based upon the
investment philosophy that dividend income is generally a significant
contributor to the returns available from investing in stocks over the long term
and that dividend income is often more consistent than capital appreciation as a
source of investment return. Moreover, the price volatility of stocks with
relatively higher dividend yields tends to be less than stocks that pay out
little dividend income, affording the fund the potential for greater principal
stability.
Because high relative dividend yield as defined above is frequently accompanied
by a lower stock price, the fund seeks to buy a stock when its relative dividend
yield is high. Conversely, it seeks to sell a stock when its dividend yield is
low relative to its history, which may be caused by an increase in the price of
the stock. The fund may then reinvest the proceeds into other relatively high
dividend yielding issues. This approach may allow the fund to take advantage of
capital appreciation opportunities presented by quality stocks that are
temporarily out of favor with the market and that are subsequently
"rediscovered."
In addition to offering above-average yields, securities selected for investment
by this strategy may provide some of the following characteristics consistent
with the fund's fundamental goal: above-average dividend growth prospects, low
price to normalized earnings (projected earnings under normal operating
conditions), to cash flow, to book value, and/or to realizable liquidation
value.
The fund's current investment strategy is not a fundamental policy of the fund
and is subject to change at the discretion of the Board and without prior
shareholder approval.
GLOBAL FUND
The fund seeks to achieve its objective by investing at least 65% of its total
assets in securities issued or guaranteed by domestic and foreign governments
and their political subdivisions, including the U.S. government, its agencies,
and authorities or instrumentalities (U.S. government securities). The fund
considers securities issued by central banks that are guaranteed by their
national governments to be government securities.
The fund selects investments to provide a high current yield and currency
stability, or a combination of yield, capital appreciation, and currency
appreciation consistent with the fund's objective. The fund may also seek to
protect or enhance income, or protect capital, through the use of forward
currency exchange contracts, options, futures contracts, options on futures, and
interest rate swaps, all of which are generally considered "derivative
securities."
The fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner that is consistent
with its objective based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, the fund will evaluate a
country's economic and political conditions such as inflation rate, growth
prospects, global trade patterns, and government policies.
As a global fund, the fund may invest in securities issued in any currency and
may hold foreign currency. Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the euro or the European Currency Unit (ECU).
Under normal economic conditions, the fund invests at least 65% of its total
assets in fixed-income securities such as bonds, notes, and debentures. Some of
the fixed-income securities may be convertible into common stock or be traded
together with warrants for the purchase of common stocks, although the fund has
no current intention of converting such securities into equity or holding them
as equity upon such conversion. The remaining 35% may be invested, to the extent
available and permissible, in equity securities, foreign or domestic currency
deposits, or equivalents such as short-term U.S. Treasury notes or repurchase
agreements.
The fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity of
the fund's investments will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when the manager expects interests rates
worldwide or in a particular country to rise, and longer when the manager
expects interest rates to fall.
The fund may also invest in other fixed-income securities of both domestic and
foreign issuers including preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates,
and conditional sales contracts. These fixed-income securities may involve
equity features, such as conversion or exchange rights or warrants for the
acquisition of stock of the same or a different issuer; participation based on
revenues, sales, or profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common stock are offered as a
unit). The fund will limit its investments in warrants, valued at the lower of
cost or market, to 5% of the fund's net assets or to warrants attached to
securities.
The fund may also invest in debt securities of supranational entities
denominated in any currency. A supranational entity is an entity designated or
supported by the national government of one or more countries to promote
economic reconstruction or development. Examples of supranational entities
include, among others, the World Bank, the European Investment Bank, and the
Asian Development Bank. The fund may, in addition, invest in debt securities
denominated in multinational currencies of issuers in any country (including
supranational issuers). The fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state, or equivalent government or are obligations
of a government jurisdiction that are not backed by its full faith and credit
and general taxing powers. U.S. rating agencies do not rate many debt
obligations of foreign issuers, especially developing market issuers, and their
selection for the fund depends on the manager's internal analysis.
SHORT-INTERMEDIATE FUND
The fund intends to invest up to 100% of its net assets in U.S. government
securities. As a fundamental policy, the fund must invest at least 65% of its
net assets in U.S. government securities. SEC guidelines require that at least
65% of the fund's total assets be invested in U.S. government securities, and
the fund will follow that policy notwithstanding its fundamental policy.
The fund may invest in obligations either issued or guaranteed by the U.S.
government and its agencies or instrumentalities including, but not limited to,
the following: direct obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes, and bonds; and obligations of U.S. government agencies or
instrumentalities such as Federal Home Loan Banks, Federal National Mortgage
Association (FNMA), Government National Mortgage Association (GNMA), Banks for
Cooperatives (including Central Bank for Cooperatives), Federal Land Banks,
Federal Intermediate Credit Banks, Tennessee Valley Authority, Export-Import
Bank of the United States, Commodity Credit Corporation, Federal Financing Bank,
Student Loan Marketing Association, Federal Home Loan Mortgage Corporation
(FHLMC), or National Credit Union Administration.
The fund may purchase certain U.S. government securities at a discount. These
securities, when held to maturity or retired, may include an element of capital
gain. The fund does not intend to hold securities for the purpose of achieving
capital gains, but will generally hold them as long as current yields on these
securities remain attractive. The fund may realize capital losses when
securities purchased at a premium are held to maturity or are called or redeemed
at a price lower than their purchase price. The fund may also realize capital
gains or losses upon the sale of securities.
MATURITY The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. The average life is likely to
be substantially less than the original maturity of the mortgage pools
underlying the securities as the result of mortgage prepayments, mortgage
refinancings, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Similarly, the average
life of callable securities will be a function of their stated maturities, call
dates, and the level of interest rates. Estimated average life will be
determined by the fund's manager and used for the purpose of determining the
average weighted maturity of the fund.
CONCENTRATION The fund will not invest more than 25% of the value of its total
assets in any one particular industry.
CREDIT UNION INVESTMENT REGULATIONS This section summarizes the
Short-Intermediate Fund's investment policies, under which, in the opinion of
the fund and based on the fund's understanding of laws and regulations governing
investment by federal credit unions on December 31, 1998, the fund would be a
permissible investment for federal credit unions. CREDIT UNION INVESTORS ARE
ADVISED TO CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT
EXTENT THE SHARES OF THE SHORT-INTERMEDIATE FUND CONSTITUTE LEGAL INVESTMENTS
FOR THEM.
All investments of the Short-Intermediate Fund will be subject to the following
limitations:
(a) All purchases and sales of securities will provide for delivery by
regular-way settlement. Regular-way settlement means delivery of a security from
a seller to a buyer within the time frame that the securities industry has
established for that type of security.
(b) Any investments by the Short-Intermediate Fund in variable-rate investments
will be limited to variable-rate investments where the index is tied to domestic
interest rates (including the U.S. dollar-denominated London Interbank Offered
Rate (LIBOR)) and not to foreign currencies, foreign interest rates, or domestic
or foreign commodity prices, equity prices, or inflation rates.
(c) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in such securities, any investments by the fund in a registered
investment company or collective investment fund will be limited to a company or
fund the prospectus of which restricts the investment portfolio to investments
and investment transactions that are permissible for federal credit unions.
(d) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may purchase and hold a municipal security only if a
nationally recognized statistical rating organization has rated it in one of the
highest rating categories.
(e) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to do so, the fund may invest in the following instruments issued by an
institution specified in Section 107(8) of the Federal Credit Union Act or
branch: (i) Yankee dollar deposits; (ii) Eurodollar deposits; (iii) banker's
acceptances; (iv) deposit notes; and (v) bank notes with original weighted
average maturities of less than five years.
(f) The Short-Intermediate Fund will only engage in repurchase transactions, in
which the fund agrees to purchase a security from a counterparty and to resell
the same or an identical security to that counterparty at a specified future
date and at a specified future price, under the following conditions: (i) the
repurchase securities will be legal investments for federal credit unions; (ii)
the fund will receive a daily assessment of the market value of the repurchase
securities, including accrued interest, and maintain adequate margin that
reflects a risk assessment of the repurchase securities and the term of the
transaction; and (iii) the fund will have entered into signed contracts with all
approved counterparties.
(g) Although the Short-Intermediate Fund does not intend, as of the date of this
SAI, to invest in reverse repurchase agreements, in the event that the fund were
to engage in such transactions, the fund would, in addition to abiding by its
fundamental policies and the regulations of the U.S. Securities and Exchange
Commission (SEC) with respect to borrowing, engage in reverse repurchase
agreements subject to the following conditions: (i) any securities the fund
receives will be permissible investments for federal credit unions, the fund
will receive a daily assessment of their market value, including accrued
interest, and the fund will maintain adequate margin that reflects a risk
assessment of the securities and the term of the transaction; (ii) any
investments the fund purchases with any cash it receives will be permissible for
federal credit unions and mature no later than the maturity of the transaction;
and (iii) the fund will have entered into signed contracts with all approved
counterparties.
(h) The Short-Intermediate Fund may engage in securities lending transactions
subject to the following conditions: (i) the fund will receive written
confirmation of the loan; (ii) the collateral for the loan will consist of cash,
and any investments the fund purchases with that cash will be permissible for
federal credit unions and will mature no later than the maturity of the
transaction; and (iii) the fund will have executed a written loan and security
agreement with the borrower.
(i) The Short-Intermediate Fund will not (i) purchase or sell financial
derivatives, such as futures, options, interest rate swaps, or forward rate
agreements; (ii) engage in adjusted trading or short sales; (iii) purchase
stripped mortgage backed securities, residual interests in CMOs or REMICs,
mortgage servicing rights, commercial mortgage related securities, or small
business related securities; or (iv) purchase a zero coupon investment with a
maturity date that is more than 10 years from the settlement date.
Below is additional information about the various securities the funds may buy.
EQUITY SECURITIES Equity securities generally entitle the holder to participate
in a company's general operating results. The purchaser of an equity security
typically receives an ownership interest in the company as well as certain
voting rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings by
the company to its owners. Equity security owners may also participate in a
company's success or lack of success through increases or decreases in the value
of the company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock, as
well as securities convertible into common stocks. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to buy a common stock at a given
time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in each fund's net asset value per share.
Independent rating organizations rate debt and convertible securities based upon
their assessment of the financial soundness of the issuer. Generally, a lower
rating indicates higher risk. Below investment grade securities are generally
those rated Ba or lower by Moody's Investors Service, Inc. (Moody's) or BB or
lower by Standard & Poor's Corporation(R) (S&P). Please see Description of Bond
Ratings.
Higher yields are ordinarily available from securities in the lower-rated
categories or from unrated securities of comparable quality. Convertible
securities generally fall within the lower-rated categories of rating agencies
(i.e., securities rated Baa or lower by Moody's or BBB or lower by S&P). The
Convertible Fund will not invest more than 10% of its total assets in securities
rated below B by Moody's or S&P or unrated securities of comparable quality. The
Equity Fund may only invest in securities that are rated at least B or above by
Moody's or S&P or unrated securities of comparable quality. Securities rated B
and comparable unrated securities are regarded as speculative and may involve
greater risks as to the timely payment of interest or dividends, including the
risk of bankruptcy or default by the issuer. The funds will not invest in
securities the manager believes involve excessive risk. If a ratings service
changes the rating on a security a fund holds or the security goes into default,
the manager will consider that event in its evaluation of the overall investment
merits of the security but will not necessarily sell the security.
The Equity Fund may invest up to a maximum of 35% of its net assets in debt
securities. In seeking securities that meet its investment objective, the Equity
Fund will buy only debt securities which are rated B or better by S&P or Ba or
better by Moody's or debt securities that are unrated but that are judged to be
of comparable quality. The Equity Fund does not intend to invest more than 5% of
its assets in fixed-income securities rated below Baa by Moody's or BBB by S&P.
Ratings, which represent the opinions of the rating services with respect to the
securities and are not absolute standards of quality, will be considered in
connection with the investment of the funds' assets but will not be a
determining or limiting factor. In its investment analysis of securities being
considered for a fund's portfolio, rather than relying principally on the
ratings assigned by rating services, the manager may also consider, among other
things, relative values based on such factors as anticipated cash flow, interest
coverage, asset coverage, earnings prospects, the experience and managerial
strength of the issuer, responsiveness to changes in interest rates and business
conditions, debt maturity schedules and borrowing requirements, and the issuer's
changing financial condition and public recognition thereof.
OTHER FIXED-INCOME SECURITIES. The Global Fund may purchase fixed-income
securities of both domestic and foreign issuers including, among others,
preference stock and all types of long-term or short-term debt obligations, such
as equipment trust certificates, equipment lease certificates, and conditional
sales contracts. Equipment-related instruments are used to finance the
acquisition of new equipment. The instrument gives the bond-holder the first
right to the equipment in the event that interest and principal are not paid
when due. Title to the equipment is held in the name of the trustee, usually a
bank, until the instrument is paid off. Equipment-related instruments usually
mature over a period of 10 to 15 years. In practical effect, equipment trust
certificates, equipment lease certificates, and conditional sales contracts are
substantially identical; they differ mainly in legal structure. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales, or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
FOREIGN SECURITIES The Convertible Fund and the Equity Fund will generally buy
foreign securities that are traded in the U.S. or buy sponsored or unsponsored
American Depositary Receipts (ADRs). Each fund may, however, buy the securities
of foreign issuers directly in foreign markets so long as, in the manager's
judgment, an established public trading market exists. The Convertible Fund and
the Equity Fund may invest up to 30% of net assets in foreign securities not
publicly traded in the U.S. The holding of foreign securities may be limited by
the Convertible Fund to avoid investment in certain Passive Foreign Investment
Companies (PFICs) and the imposition of a PFIC tax on the Fund resulting from
such investments. The Equity Fund may not invest more than 10% of its total
assets in securities of developing markets.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents. A
fund does not consider any security that it acquires outside the U.S. and that
is publicly traded in the U.S., on a foreign securities exchange, or in a
foreign securities market to be illiquid so long as the fund acquires and holds
the security with the intention of re-selling the security in the foreign
trading market, the fund reasonably believes it can readily dispose of the
security for cash in the U.S. or foreign market, and current market quotations
are readily available.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with applicable U.S. and foreign currency
restrictions and other laws limiting the amount and type of foreign investments.
DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. Generally, depositary receipts in registered
form are designed for use in the U.S. securities market, and depositary receipts
in bearer form are designed for use in securities markets outside the U.S.
Depositary receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored programs.
In sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between such information and the market value of the depositary receipts.
Depositary receipts also involve the risks of other investments in foreign
securities, as discussed below.
OBLIGATIONS OF DEVELOPING COUNTRIES. The Global Fund may invest in the
fixed-income obligations of governments, government agencies, and corporations
of developing countries. As of the date of this SAI, such opportunities are
limited as many developing countries are rescheduling their existing loans and
obligations. However, as restructuring is completed and economic conditions
improve, these obligations may become available at discounts and offer the
Global Fund the potential for current U.S. dollar income. These instruments are
not traded on any exchange. However, the manager believes there may be a market
for such securities either in multinational companies wishing to purchase such
assets at a discount for further investment, or from the issuing governments
which may decide to redeem their obligations at a discount.
CONVERTIBLE SECURITIES A convertible security is generally a debt obligation or
preferred stock that may be converted within a specified period of time into a
certain amount of common stock of the same or a different issuer. A convertible
security provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because both interest rate and
market movements can influence its value, a convertible security is not as
sensitive to interest rates as a similar fixed-income security, nor is it as
sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security, but if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While each fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS - each
issuer has a different acronym for their version of these securities) are
considered the most equity-like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors some
form of yield enhancement in return for some of the upside potential in the form
of a conversion premium. Typical characteristics of mandatories include: issued
as preferred stock, convertible at premium, pay fixed quarterly dividend
(typically 500 to 600 basis points higher than common stock dividend), and are
non-callable for the life of the security (usually three to five years). An
important feature of mandatories is that the number of shares received at
maturity is determined by the difference between the price of the common stock
at maturity and the price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPRS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities,
i.e., they are issued as preferred stock convertible into common stock at a
premium and pay quarterly dividends. Through this structure the company
establishes a wholly owned special purpose vehicle whose sole purpose is to
issue convertible preferred stock. The offering proceeds pass-through to the
company who issues the special purpose vehicle a convertible subordinated
debenture with identical terms to the convertible preferred issued to investors.
Benefits to the issuer include increased equity credit from rating agencies and
the deduction of coupon payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into common
stock at maturity and offers investors a higher current dividend than the
underlying common stock. The difference between these structures and other
mandatories is that the participation in stock price appreciation is capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest is
actually paid, the accrued interest may be deducted for tax purposes. Because of
their put options, these bonds tend to be less sensitive to changes in interest
rates than either long maturity bonds or preferred stocks. The put options also
provide enhanced downside protection while retaining the equity participation
characteristics of traditional convertible bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and the fund's ability to dispose of particular securities, when necessary, to
meet the fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the credit worthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may also make it more
difficult for the fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio. The Convertible Fund and the Equity
Fund, however, intend to acquire liquid securities, though there can be no
assurances that this will be achieved.
SYNTHETIC CONVERTIBLES. The Convertible Fund may invest a portion of its assets
in "synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "equity securities"
for purposes of the fund's investment policy regarding those securities.
Synthetic convertible securities differ from true convertible securities in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the manager expects
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when the manager determines that such a
combination would better promote the fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
REAL ESTATE INVESTMENT TRUSTS ("REITS") The Equity Fund may invest up to 15% of
its assets in REITs that are listed on a securities exchange or traded
over-the-counter and meet the fund's investment objective. The Convertible Fund
may invest in convertible securities of REITs. In order to qualify as a REIT, a
company must derive at least 75% of its gross income from real estate sources
(rents, mortgage interest, gains from the sale of real estate assets), and at
least 95% from real estate sources, plus dividends, interest, and gains from the
sale of securities. Real property, mortgage loans, cash, and certain securities
must comprise 75% of a company's assets. In order to qualify as a REIT, a
company must also make distributions to shareholders aggregating annually at
least 95% of its REIT taxable income.
BANK SECURITIES The Global Fund may invest in obligations of domestic and
foreign banks which, at the date of investment, have total assets (as of the
date of their most recently published financial statements) in excess of one
billion dollars (or foreign currency equivalent at then-current exchange rates).
LOAN PARTICIPATIONS The Global Fund may acquire loan participations in which the
fund will buy from a lender a portion of a larger loan that the lender has made
to a borrower. Generally, loan participations are sold without guarantee or
recourse to the lending institution and are subject to the credit risks of both
the borrower and the lending institution. Loan participations, however, may
enable the fund to acquire an interest in a loan from a financially strong
borrower, which the fund could not do directly.
Loan participations may have speculative characteristics. The Global Fund may
purchase loan participations at par or which sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the loan participation may appreciate in value but not beyond par
value.
The Global Fund may acquire loan participations that sell at a discount, from
time to time, when it believes the investments offer the possibility of
long-term appreciation in value in addition to current income. An investment in
loan participations carries a high degree of risk and may have the consequence
that interest payments with respect to such securities may be reduced, deferred,
suspended, or eliminated and may have the further consequence that principal
payments may likewise be reduced, deferred, suspended, or cancelled, causing the
loss of the entire amount of the investment. The Global Fund generally will
acquire loans from a bank, finance company, or other similar financial services
entity (Lender).
Loan participations are interests in floating- or variable-rate senior loans
(Loans) to U.S. corporations, partnerships, and other entities (Borrowers). The
Loans typically have the most senior position in a Borrower's capital structure,
although some Loans may hold an equal ranking with other senior securities of
the Borrower. Although the Loans generally are secured by specific collateral,
the Global Fund may invest in Loans that are not secured by any collateral.
Uncollateralized Loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be readily liquidated,
and there is no assurance that the liquidation of such assets would fully
satisfy a Borrower's obligation under a Loan. The Global Fund is not subject to
any restrictions with respect to the maturity of the Loans in which it purchases
participation interests.
Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the manager may consider ratings in determining whether to
invest in a particular Loan, such ratings will not be the determinative factor
in the manager's analysis.
Loans are not readily marketable and may be subject to restrictions on resale.
Any secondary purchases and sales of loan participations generally are conducted
in private transactions between buyers and sellers.
When acquiring a loan participation, the Global Fund will have a contractual
relationship only with the Lender (typically an entity in the banking, finance,
or financial services industries), not with the Borrower. The Global Fund has
the right to receive payments of principal and interest to which it is entitled
only from the Lender selling the loan participation and only upon receipt by the
Lender of payments from the Borrower. In connection with purchasing loan
participations, the Global Fund generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, the
Global Fund may assume the credit risk of both the Borrower and the Lender
selling the loan participation. In the event of the insolvency of the Lender
selling a loan participation, the Global Fund may be treated as a general
creditor of the Lender, and may not benefit from any set-off between the Lender
and the Borrower.
U.S. GOVERNMENT SECURITIES The funds may invest in U.S.
government securities. U.S. government securities include U.S.
Treasury obligations and obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities, such as GNMA,
which carries a guarantee backed by the full faith and credit of
the U.S. Treasury. GNMA may borrow from the U.S. Treasury to the
extent needed to make payments under its guarantee. No assurances
can be given, however, that the U.S. government will provide
financial support to the obligations of the other U.S. government
agencies or instrumentalities in which the funds may invest,
since it is not obligated to do so. These agencies and
instrumentalities are supported by the issuer's right to borrow
an amount limited to a specific line of credit from the U.S.
Treasury, the discretionary authority of the U.S. government to
purchase certain obligations of an agency or instrumentality, or
the credit of the agency or instrumentality.
U.S. government securities do not generally involve the credit risks associated
with other types of interest-bearing securities, and, as a result, the yields
available from such securities are generally lower than the yields available
from other types of interest-bearing securities. Like all interest-bearing
securities, however, the market values of U.S. government securities change as
interest rates fluctuate. In addition, the mortgages underlying GNMAs are
subject to repayment prior to maturity, and in times of falling mortgage
interest rates premature repayments may be more likely. To the extent GNMAs held
by a fund are prepaid, the returned principal will be reinvested in new
obligations at then-prevailing interest rates which may be lower than those of
previously held obligations.
CALLABLE SECURITIES These structures give the issuer the right to redeem the
security on a given date or dates (known as the call dates) prior to maturity.
In return, these securities typically offer a higher yield. The period of call
protection between the time of issue and the first call date varies from
security to security. Documentation for callable securities usually requires
that investors be notified of a call within a prescribed period of time.
Issuers typically exercise call options in periods of declining interest rates,
thereby creating reinvestment risk for the investor. On the other hand, if an
investor expects a security to be called and it is not, the investor faces an
effective maturity extension. Certain securities may be called only in whole
(the entire security is redeemed), while others may be called in part (a portion
of the total face value is redeemed) and possibly from time to time as
determined by the issuer.
MORTGAGE SECURITIES Mortgage securities represent an ownership interest in
mortgage loans made by banks and other financial institutions to finance
purchases of homes, commercial buildings or other real estate. These mortgage
loans may have either fixed or adjustable interest rates. The individual
mortgage loans are packaged or "pooled" together for sale to investors. As the
underlying mortgage loans are paid off, investors receive principal and interest
payments.
A mortgage-backed security is an interest in a pool of mortgage loans. The
primary issuers or guarantors of these securities are GNMA, FNMA and FHLMC. GNMA
creates mortgage-backed securities from pools of government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks, and savings and loan
associations. FNMA and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed residential mortgages
obtained from various entities, including savings and loan associations, savings
banks, commercial banks, credit unions, and mortgage bankers. The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Mortgage securities from FNMA and FHLMC are
not backed by the full faith and credit of the U.S. government. FNMA guarantees
full and timely payment of all interest and principal, and FHLMC guarantees
timely payment of interest and the ultimate collection of principal. Securities
issued by FNMA are supported by the agency's right to borrow money from the U.S.
Treasury under certain circumstances. Securities issued by FHLMC are supported
only by the credit of the agency. There is no guarantee that the government
would support government agency securities and, accordingly, they may involve a
risk of non-payment of principal and interest. Nonetheless, because FNMA and
FHLMC are instrumentalities of the U.S. government, these securities are
generally considered to be high quality investments having minimal credit risks.
The yields on these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities due largely
to their prepayment risk.
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with monthly payments consisting of a pro rata share of
both regular interest and principal payments, as well as unscheduled early
prepayments, on the underlying mortgage pool (less GNMA's, FHLMC's, or FNMA's
fees and any applicable loan servicing fees).
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of mortgage-backed securities nor do they extend to the value
of the fund's shares. In general, the value of fixed-income securities varies
with changes in market interest rates. Fixed-rate mortgage securities generally
decline in value during periods of rising interest rates, whereas coupon rates
of adjustable rate mortgage securities move with market interest rates, and thus
their value tends to fluctuate to a lesser degree. In view of these factors, the
ability of a fund to obtain a high level of total return may be limited under
varying market conditions.
ZERO COUPON BONDS The Short-Intermediate Fund may invest in zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
Zero coupon bonds are debt obligations that are issued at a significant discount
from face value. The original discount approximates the total amount of interest
the bonds will accrue and compounds over the period until maturity or the first
interest accrual date at a rate of interest reflecting the market rate of the
security at the time of issuance. The fund will accrue income on such
investments for tax and accounting purposes, as required, which is distributable
to shareholders and which, because no cash is received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy the fund's
distribution obligations.
CASH MANAGEMENT There are no restrictions or limitations on investments in
obligations of the U.S. or of corporations chartered by Congress as federal
government instrumentalities. The underlying assets of the funds may be retained
in cash, including cash equivalents, which are Treasury bills, commercial paper,
and short-term bank obligations such as certificates of deposit, bankers'
acceptances, and repurchase agreements. It is intended, however, that only so
much of the underlying assets of the funds be retained in cash as is deemed
desirable or expedient under then-existing market conditions.
TEMPORARY INVESTMENTS When the funds' manager believes that the securities
trading markets or the economy are experiencing excessive volatility or a
prolonged general decline, or other adverse conditions exist, if may invest each
fund's portfolio in a temporary defensive manner.
When maintaining a temporary defensive position, the Convertible Fund may invest
its assets without limit in U.S. government securities and, subject to certain
tax diversification requirements, commercial paper (short-term debt securities
of large corporations), certificates of deposit and bankers' acceptances of
banks having total assets in excess of $5 billion, repurchase agreements, and
other money market securities.
When maintaining a temporary defensive position, the Equity Fund may invest any
portion of its assets in U.S. government securities, high grade commercial
paper, bankers' acceptances, and variable interest rate corporate or bank notes.
During periods when the manager believes that the Global Fund should be in a
temporary defensive position, the fund may have less than 25% of its assets
concentrated in foreign government securities and may invest instead in U.S.
government securities, or in cash (including foreign currency) or
cash-equivalent, short-term obligations, including, but not limited to, the
following: CDs, commercial paper, short-term notes, and repurchase agreements
secured by U.S. government securities. In particular, for defensive purposes a
larger portion of the Global Fund's assets may be invested in U.S. dollar
denominated obligations to reduce the risks inherent in non-dollar denominated
assets.
LOANS OF PORTFOLIO SECURITIES Each fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, if such loans do
not exceed the following percentage of the value of the fund's total assets at
the time of the most recent loan: 30% in the case of the Global Fund, and 10% in
the case of the Short-Intermediate Fund, the Convertible Fund, and Equity Fund.
The borrower must deposit with the fund's custodian bank collateral with an
initial market value of at least 102% of the market value of the securities
loaned, including any accrued interest, with the value of the collateral and
loaned securities marked-to-market daily to maintain collateral coverage of at
least 102% (100% in the case of the Equity Fund). This collateral shall consist
of cash. Under the securities loan agreement, the fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
WHEN-ISSUED SECURITIES The Global Fund may purchase securities on a
"when-issued" or "forward-delivery" basis, and the Short-Intermediate Fund may
buy obligations on a when-issued or "delayed-delivery" basis, which means that
the obligations will be delivered at a future date. Although the Global Fund is
not limited in the amount of securities it may commit to buy on such basis, it
is expected that under normal circumstances the fund will not commit more than
30% of its assets to such purchases. The Short-Intermediate Fund is not subject
to any percentage limit on the amount of its assets that may be invested in
when-issued purchase obligations. A fund does not pay for the securities until
received, nor does the fund start earning interest on them until the scheduled
delivery date. In order to invest its assets immediately while awaiting delivery
of securities purchased on such basis, the Global Fund will normally invest the
amount required to settle the transaction in short-term securities that offer
same-day settlement and earnings. These short-term securities may bear interest
at a lower rate than longer-term securities.
Purchases of securities on a when-issued, forward-delivery, or delayed-delivery
basis are subject to more risk than other types of purchases, including market
fluctuation and the risk that the value or yields at delivery may be more or
less than the purchase price or the yields available when the transaction was
entered into. Although a fund will generally buy securities on a when-issued
basis with the intention of acquiring the securities and not for speculative
purposes, it may sell the securities before the settlement date if it is deemed
advisable. In such a case, the fund may incur a gain or loss because of market
fluctuations during the period since the fund committed to purchase the
securities. When a fund is the buyer in such a transaction, it will maintain, in
a segregated account with its custodian bank, cash or high-grade marketable
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. To the extent the Short-Intermediate Fund
engages in when-issued and delayed delivery transactions, it will do so only for
the purpose of acquiring portfolio securities consistent with the fund's
investment objective and policies, and not for the purpose of investment
leverage. In when-issued and delayed delivery transactions, the fund relies on
the seller to complete the transaction. The other party's failure may cause the
fund to miss a price or yield considered advantageous.
REPURCHASE AGREEMENTS Each fund generally will have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements. Under
a repurchase agreement, the fund agrees to buy securities guaranteed as to
payment of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. The fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS. The Global Fund may also enter into reverse
repurchase agreements, which are the opposite of repurchase agreements but
involve similar mechanics and risks. The Global Fund sells securities to a bank
or dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 102% of the dollar amount sold by
the Global Fund are segregated as collateral and marked-to-market daily to
maintain coverage of at least 100%. A default by the purchaser might cause the
Global Fund to experience a loss or delay in the liquidation costs. The Global
Fund intends to enter into reverse repurchase agreements with domestic or
foreign banks or securities dealers. The manager will evaluate the
creditworthiness of these entities prior to engaging in such transactions, under
the general supervision of the fund's Board of Trustees.
SHORT SALES AGAINST THE BOX The Convertible Fund may make short sales of common
stocks, provided the fund owns an equal amount of these securities or owns
securities that are convertible or exchangeable, without payment of further
consideration, into an equal amount of such common stock. In a short sale the
fund does not immediately deliver the securities sold and does not receive the
proceeds from the sale. To secure its obligation to deliver the securities sold
short, the fund will deposit collateral with its custodian bank that will
generally consist of an equal amount of such securities or securities
convertible into or exchangeable for at least an equal amount of such
securities. The fund may make a short sale when the manager believes the price
of the stock may decline and when, for tax or other reasons, the manager does
not currently want to sell the stock or convertible security it owns. In this
case, any decline in the value of the fund's portfolio securities would be
reduced by a gain in the short sale transaction. Conversely, any increase in the
value of the fund's portfolio securities would be reduced by a loss in the short
sale transaction. The fund may not make short sales or maintain a short position
unless, at all times when a short position is open, not more than 20% of its
total assets (taken at current value) is held as collateral for such sales.
BORROWING The Global Fund may borrow from banks, for temporary or emergency
purposes only, up to 30% of its total assets, and pledge up to 30% of its total
assets in connection therewith. The Global Fund will not make new investments
while any outstanding borrowings exceed 5% of its total assets. Neither the
Short-Intermediate Fund, nor the Convertible Fund, nor the Equity Fund borrows
money or mortgages or pledges any of its assets, except that each may borrow
from banks for temporary or emergency purposes up to 5% of its total assets and
pledge up to 5% of its total assets in connection therewith.
ILLIQUID INVESTMENTS Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. The Short-Intermediate Fund has not purchased
and does not intend currently to purchase illiquid or restricted securities.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which the
fund has valued them.
Illiquid investments include, among other things, repurchase agreements of more
than seven days duration, over-the-counter options and the assets used to cover
such options, and other securities which are not readily marketable. Investments
in savings deposits are generally considered illiquid and will, together with
other illiquid investments, not exceed 10% of each fund's total net assets.
Notwithstanding this limitation, the Board has authorized each fund to invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933, as amended (1933 Act) (restricted
securities), where such investment is consistent with the fund's investment
objective and has authorized such securities to be considered liquid to the
extent the manager determines that there is a liquid institutional or other
market for such securities. For example, restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the 1933 Act and for which a liquid institutional market has developed
will be considered liquid even though such securities have not been registered
pursuant to the 1933 Act.
The Board will review any determination by the manager to treat a restricted
security as a liquid security on an ongoing basis, including the manager's
assessment of current trading activity and the availability of reliable price
information. In determining whether a restricted security is properly considered
a liquid security, the manager and the Board will take into account the
following factors: (i) the frequency of trades and quotes for the security; (ii)
the number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (iii) dealer undertakings to make a market in the
security; and (iv) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). To the extent a fund invests
in restricted securities that are deemed liquid, the general level of
illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts.
CURRENCY TECHNIQUES AND HEDGING The Global Fund may invest in options, futures,
options on futures, and forward contracts, although the fund has no present
intention of using any of these techniques except forward contracts. While there
are no specific limits on the fund's use of these practices other than those
limits stated below, the fund only engages in these practices for hedging
purposes, or in other words for the purpose of protecting against declines in
the value of the fund's portfolio securities and the income on these securities.
The production of additional income may at times be a secondary purpose of these
practices.
FORWARD CURRENCY EXCHANGE CONTRACTS. The Global Fund may enter into forward
currency exchange contracts (forward contracts) to attempt to minimize the risk
to the fund from adverse changes in the relationship between currencies or to
enhance income. A forward contract is an obligation to buy or sell a specific
currency for an agreed price at a future date that is individually negotiated
and privately traded by currency traders and their customers.
The fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
The fund may also enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell an amount of that foreign currency approximating the
value of some or all of the fund's portfolio securities denominated in such
foreign currency. Similarly, when the fund believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, it may enter into a
forward contract to buy that foreign currency for a fixed dollar amount.
The fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of the fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the ability
of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The Board has adopted the requirement that the Global Fund may only use futures
contracts and options on futures contracts for hedging purposes and not for
speculation. In addition, the Global Fund will not buy or sell futures contracts
and options on futures contracts if immediately thereafter the amount of initial
margin deposits on all the futures positions of the fund and premiums paid on
options on futures contracts would exceed 5% of the market value of the total
assets of the fund.
OPTIONS ON FOREIGN CURRENCIES. The Global Fund may buy and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or
over-the-counter) for hedging purposes to protect against declines in the U.S.
dollar value of foreign portfolio securities and against increases in the U.S.
dollar cost of foreign securities or other assets to be acquired. As in the case
of other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received.
The fund could be required to buy or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to the fund's position,
the fund may forfeit the entire amount of the premium plus related transaction
costs.
DERIVATIVE SECURITIES Although the funds have no present intention of investing
in the following types of securities, the funds may invest in the securities
described below. These securities are generally considered "derivative
securities."
OPTIONS. The Convertible Fund and the Equity Fund may write covered call options
on securities they own that are listed for trading on a national securities
exchange and may buy listed call options. The Convertible Fund's investment in
options will be for portfolio hedging purposes in an effort to stabilize
principal fluctuations and not for speculation. The Convertible Fund's
investments in options will not exceed 5% of its net assets.
The Convertible Fund and the Equity Fund may each also buy put options on common
stock that they own or may acquire through the conversion or exchange of other
securities to protect against a decline in the market value of the underlying
security or to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. The Convertible Fund and the
Equity Fund may each buy call and put options on stock indices in order to hedge
against the risk of market or industry-wide stock price fluctuations. The
Convertible Fund, the Equity Fund and the Global Fund may each buy put options
to hedge against a decline in the value of its portfolio. By using put options
in this way, a fund will reduce any profit it might otherwise have realized in
the underlying security by the amount of the premium paid for the put option
plus transaction costs.
It will generally be the Convertible Fund's and the Equity Fund's policy, in
order to avoid the exercise of a call option written by the fund, to cancel its
obligation under the call option by entering into a closing purchase
transaction, if available, unless it is determined to be in the fund's interest
to deliver the underlying securities from its portfolio. The premium which a
fund will pay in executing a closing purchase transaction may be higher or lower
than the premium it received when writing the option, depending in large part
upon the relative price of the underlying security at the time of each
transaction. The aggregate premiums paid on all such options held at any time
will not exceed 20% of the Convertible Fund's net assets.
The Global Fund may write covered put and call options and buy
put and call options on U.S. or foreign securities that are
traded on U.S. and foreign securities exchanges and in
over-the-counter markets.
The risks of the Global Fund's transactions in options on foreign exchanges are
similar to the risks of investing in foreign securities. In addition, a foreign
exchange may impose different exercise and settlement terms, procedures, and
margin requirements than an U.S. exchange.
The Global Fund may buy call options to hedge against an increase in the price
of securities that the fund anticipates purchasing in the future. The premium
paid for the call option plus any transaction costs will reduce any benefit the
Global Fund may realize upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the option may expire resulting in a
loss to the Global Fund equal to the cost of the options.
The ability of the Global Fund to engage in options transactions
is subject to the following limitations: a) the fund may not
invest more than 5% of its total assets in options (including
straddles and spreads); b) the obligations of the fund under put
options written by the fund may not exceed 50% of the fund's net
assets; and c) the aggregate premiums on all options purchased by
the fund may not exceed 20% of its net assets.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the buyer of the option the right to buy and
obligates the writer of the option to sell the underlying security at the
exercise price at any time during the option period, regardless of the market
price of the underlying security. The buyer of an option pays a cash premium
that typically reflects, among other things, the relationship of the exercise
price to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors, and interest rates.
When a fund writes or sells covered call options, it will receive a cash premium
which can be used in whatever way is felt to be most beneficial to the fund. The
risk associated with covered option writing is that in the event of a price rise
on the underlying security which would likely trigger the exercise of the call
option, the fund will not participate in the increase in price beyond the
exercise price.
A put option gives the holder the right to sell the underlying security at the
option exercise price at any time during the option period. A fund may pay for a
put either separately or by paying a higher price for securities that are
purchased subject to a put, thereby increasing the cost of the securities and
reducing the yield otherwise available from the same securities.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. Likewise, an investor who is the
holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. If the Global Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security. However, a writer or holder of an option may not effect a closing
transaction after being notified of the exercise of the option.
A fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the option. A fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to purchase
the option.
Effecting a closing transaction will permit the cash or proceeds from the
concurrent sale of any securities subject to the option to be used for other
fund investments. There is no guarantee in any particular situation that either
a closing purchase or a closing sale transaction can be effected. If a fund is
unable to effect a closing purchase transaction in a secondary market with
respect to options it has written, it will not be able to sell the underlying
security or other asset covering the option until the option expires or it
delivers the underlying security or asset upon exercise.
The writer of an option may have no control over when the underlying securities
must be sold in the case of a call option, or purchased in the case of a put
option, since the writer of certain options may be assigned an exercise notice
at any time prior to the expiration of the option. Whether or not an option
expires unexercised, the writer retains the amount of the premium.
There is no assurance that a liquid market will exist for a given option at any
particular time. To mitigate this risk, the Convertible Fund and the Equity Fund
will ordinarily purchase and write options only if a secondary market for the
option exists on a national securities exchange or in the over-the-counter
market. During the option period, if a fund has written a covered call option,
it will have given up the opportunity to profit from a price increase in the
underlying securities above the exercise price in return for the premium on the
option. However, as long as its obligation as a writer continues, the fund will
have retained the risk of loss should the price of the underlying security
decline.
The Global Fund may write options in connection with "buy-and-write"
transactions; that is, the fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of a
call option may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of-the-money") the current value of the underlying security at the time
the option is written.
Call and put options on stock indices are similar to options on securities
except that, rather than the right to buy or sell particular securities at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option,
expressed in dollars multiplied by a specified number. Thus, unlike options on
individual securities, all settlements are in cash, and gain or loss depends on
price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual securities.
INTEREST RATE SWAPS. The Global Fund may participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity, while the
other has an interest rate that changes in accordance with changes in a
designated benchmark (i.e., LIBOR, prime, commercial paper, or other
benchmarks). The obligations to make repayment of principal on the underlying
securities are not exchanged. These transactions generally require the
participation of an intermediary, frequently a bank.
Interest rate swaps permit a party seeking a floating rate obligation to acquire
the obligation at a lower rate than is directly available in the credit market,
while permitting the party desiring a fixed-rate obligation to acquire the
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed-rate obligations at a low enough coupon rate to cover the
cost involved.
FUTURES CONTRACTS. The Global Fund may enter into contracts for the purchase or
sale for future delivery of debt securities or currency (futures contracts). A
sale of a futures contract means the acquisition and assumption of a contractual
obligation to deliver the securities or currency called for by the contract at a
specified price on a specified date. A purchase of a futures contract means the
acquisition of a contractual right and obligation to acquire the securities or
currency called for by the contract at a specified price on a specified date.
The Global Fund will enter into futures contracts that are based on foreign
currencies or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes, GNMA
modified pass-through mortgage-backed securities, and three-month U.S. Treasury
bills. The Global Fund may also enter into futures contracts that are based on
corporate securities and non-U.S. government debt securities when such
securities become available.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities or currency. The termination of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical offsetting futures contract calling for
delivery in the same month. Such a transaction cancels the obligation to make or
take delivery of the underlying security or currency. Since all transactions in
the futures market are made, offset, or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the Global Fund
will incur brokerage fees when it purchases or sells futures contracts.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those markets, are
subject to distortions. First, all participants in the futures markets are
subject to initial deposit and variation margin requirements. Rather than
meeting additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash (securities) or foreign currency and futures
markets. Second, the liquidity of the futures market depends on participants
entering into offsetting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the
futures market could be reduced, thus causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the manager may still not result in a successful hedging transaction.
OPTIONS ON FUTURES CONTRACTS. The Global Fund intends to purchase and write
options on futures contracts for hedging purposes only. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security or currency. Depending on the pricing of
the option compared to either the price of the futures contract upon which it is
based or the price of the underlying debt securities or currency, it may or may
not be less risky than direct ownership of the futures contract of the
underlying debt securities or currency. As with the purchase of futures
contracts, when the Global Fund is not fully invested, it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates or appreciation in the value of a foreign currency against the
U.S. dollar.
If the Global Fund writes a call option on a futures contract and the futures
price at expiration of the option is below the exercise price, the fund will
retain the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's portfolio
holdings. If the futures price at expiration of the option is higher than the
exercise price, the Global Fund will retain the full amount of the option
premium, which may provide a partial hedge against any increase in the price of
securities which the fund intends to purchase. If a put or call option the
Global Fund has written is exercised, the fund will incur a loss, which will be
reduced by the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, the Global Fund's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of its portfolio securities.
The Global Fund's ability to engage in the options on futures strategies
described above will depend on the availability of liquid markets in such
instruments. Markets in options on futures are relatively new and still
developing, and it is impossible to predict the amount of trading interest that
may exist in various types of options on futures. Therefore, no assurance can be
given that the Global Fund will be able to use these instruments effectively for
the purposes set forth above. Furthermore, the Global Fund's ability to engage
in options on futures transactions may be limited by tax considerations.
OPTIONS ON FOREIGN CURRENCIES. The Global Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
As with other types of options, however, the benefit the Global Fund derives
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Global Fund
could sustain losses on transactions in foreign currency options that would
require the fund to forego a portion or all of the benefits of advantageous
changes in such rates.
The Global Fund may also write options on foreign currencies for hedging
purposes. As with other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium received, and only if rates move in the expected direction. If this does
not occur, the option may be exercised and the Global Fund would be required to
purchase or sell the underlying currency at a loss, which may not be fully
offset by the amount of the premium received. As a result of writing options on
foreign currencies, the Global Fund may also be required to forego all or a
portion of the benefits that might otherwise have been obtained from favorable
changes in currency exchange rates.
All call options written on foreign currencies will be covered.
The Global Fund proposes to take advantage of investment opportunities in the
area of options, futures contracts, and options on futures contracts that are
not presently contemplated for use by the fund or that are not currently
available but may be developed in the future, to the extent such opportunities
are both consistent with the fund's investment objective and policies and are
legally permissible transactions for the fund. These opportunities, if they
arise, may involve risks that are different from those involved in the options
and futures activities described above.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Convertible Fund, the Equity Fund and the Short-Intermediate
Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that
the Convertible Fund may sell securities "short against the box" on the terms
and conditions described in the SAI.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of the fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of the fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer. To the
extent permitted by exemptions granted under the 1940 Act, the funds may invest
in shares of money market funds managed by the manager or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the trust, one or more
of its officers, trustees or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs; however, the Convertible Fund and the
Equity Fund may write call options which are listed for trading on a national
securities exchange and purchase put options on securities in their portfolios
(see "Goals and Strategies"). The Convertible Fund and the Equity Fund may also
purchase call options to the extent necessary to cancel call options previously
written and may purchase listed call options provided that the value of the call
options purchased will not exceed 5% of the fund's net assets. Such funds may
also purchase call and put options on stock indices for defensive hedging
purposes. (The Equity Fund will comply with the California Corporate Securities
Rules as they pertain to prohibited investments.) At present, there are no
options listed for trading on a national securities exchange covering the types
of securities which are appropriate for investment by the Short-Intermediate
Fund and, therefore, there are no option transactions available for that fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition, or reorganization; or except to the extent
the funds invest their uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Templeton Group of Funds
provided i) their purchases and redemptions of such money fund shares may not be
subject to any purchase or redemption fees, ii) their investments may not be
subject to duplication of management fees, nor to any charge related to the
expense of distributing the fund's shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and (iii) provided aggregate
investments by the fund in any such money fund do not exceed (A) the greater of
(i) 5% of the fund's total net assets or (ii) $2.5 million, or (B) more than 3%
of the outstanding shares of any such money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the fund from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.
Restriction No. 9 above does not prevent a fund from investing in
REITs if they meet the investment goal and policies of the fund.
The Equity Fund, as noted in the prospectus, may invest up to 15%
of its net assets in REITs.
The Global Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30% of
its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and except that the fund may make margin deposits in connection
with futures contracts and options on futures contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 30% of the value of the fund's total assets
(taken at market value) at the time of the most recent loan. Also, entry into
repurchase agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any one
industry, other than foreign governments.
6. Purchase from or sell any portfolio securities to its officers and trustees,
or any firm of which any officer or trustee is a member, as principal, except
that the fund may deal with such persons or firms as brokers and pay a customary
brokerage commission; retain securities of any issuer, if to the knowledge of
the fund, one or more of its officers, trustees or the investment manager own
beneficially more than one-half of 1% of the securities of such issuer and all
such persons together own beneficially more than 5% of such securities.
7. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
8. Invest in interests in oil, gas or other mineral exploration or development
programs.
9. Invest in companies for the purpose of exercising control or management.
10. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short (short sales against the box), and unless not more than
10% of the fund's net assets (taken at market value) is held as collateral for
such sales at any one time.
The Global Fund presently has the following additional restrictions, which are
not fundamental and may be changed without shareholder approval.
The Global Fund may not:
1. Purchase any securities issued by a corporation that has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
2. Purchase securities of other investment companies.
3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures contracts, forward contracts or repurchase transactions.
The Convertible Fund and the Global Fund may also be subject to investment
limitations imposed by foreign jurisdictions in which the funds sell their
shares.
If a bankruptcy or other extraordinary event occurs concerning a particular
security a fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
funds intend to sell such investments as soon as practicable while maximizing
the return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
RISKS
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MORTGAGE SECURITIES RISK The Short-Intermediate Fund's investment in
mortgage-backed securities differs from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans. During
periods of declining interest rates, the volume of principal prepayments
generally increases as borrowers refinance their mortgages at lower rates. The
fund may be forced to reinvest returned principal at lower interest rates,
reducing the fund's income. For this reason, mortgage-backed securities may be
less effective than other types of securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation
during periods of falling interest rates than other investments with similar
maturities. A reduction in the anticipated rate of principal prepayments,
especially during periods of rising interest rates, may increase the effective
maturity of mortgage-backed securities, making them more susceptible than other
debt securities to a decline in market value when interest rates rise. This
could increase the volatility of the fund's returns and share price.
To the extent mortgage securities are purchased at a premium, unscheduled
principal prepayments, including prepayments resulting from mortgage
foreclosures, may result in some loss of the holder's principal investment to
the extent of the premium paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current and total returns and
will accelerate the recognition of income which, when distributed to you, will
be taxable as ordinary income.
LOWER RATED SECURITIES Because the Global Fund and the Convertible Fund may
invest in securities below investment grade, an investment in the fund is
subject to a higher degree of risk than an investment in a fund that invests
primarily in higher-quality securities. You should consider the increased risk
of loss to principal that is present with an investment in higher risk
securities, such as those in which the Global Fund and the Convertible Fund
invest. Accordingly, an investment in the Global Fund or the Convertible Fund
should not be considered a complete investment program and should be carefully
evaluated for its appropriateness in light of your overall investment needs and
goals.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities.
Issuers of high yield, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with buying the securities of these issuers is generally
greater than the risk associated with higher-quality securities. For example,
during an economic downturn or a sustained period of rising interest rates,
issuers of lower-quality securities may experience financial stress and may not
have sufficient cash flow to make interest payments. The issuer's ability to
make timely interest and principal payments may also be adversely affected by
specific developments affecting the issuer, including the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Global Fund's or the Convertible Fund's portfolio defaults, the fund may
have unrealized losses on the security, which may lower the fund's net asset
value. Defaulted securities tend to lose much of their value before they
default. Thus, the Global Fund's or the Convertible Fund's net asset value may
be adversely affected before an issuer defaults. In addition, the Global Fund or
the Convertible Fund may incur additional expenses if it must try to recover
principal or interest payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for the fund. The premature disposition of a high
yield security due to a call or buy-back feature, the deterioration of an
issuer's creditworthiness, or a default by an issuer may make it more difficult
for a fund to manage the timing of its income. To generate cash to satisfy these
distribution requirements, the Global Fund or the Convertible Fund may have to
sell portfolio securities that it otherwise may have continued to hold or use
cash flows from other sources, such as the sale of fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Global Fund or the Convertible Fund's
ability to sell a security in response to a specific economic event, such as a
deterioration in the creditworthiness of the issuer, or if necessary to meet the
fund's liquidity needs. Reduced liquidity may also make it more difficult to
obtain market quotations based on actual trades for purposes of valuing the
Global Fund or the Convertible Fund's portfolio.
The Global Fund and the Convertible Fund may buy high yield, fixed-income
securities that are sold without registration under the federal securities laws
and therefore carry restrictions on resale. While many high yielding securities
have been sold with registration rights, covenants, and penalty provisions for
delayed registration, if the Global Fund or the Convertible Fund is required to
sell restricted securities before the securities have been registered, it may be
deemed an underwriter of the securities under the Securities Act of 1933, which
entails special responsibilities and liabilities. The Global Fund or the
Convertible Fund may also incur special costs in disposing of restricted
securities, although the Global Fund or the Convertible Fund will generally not
incur any costs when the issuer is responsible for registering the securities.
The Global Fund and the Convertible Fund may buy high yield, fixed-income
securities during an initial underwriting. These securities involve special
risks because they are new issues. The manager will carefully review their
credit and other characteristics. Neither the Global Fund nor the Convertible
Fund has an arrangement with its underwriter or any other person concerning the
acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993 depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Global Fund's or the
Convertible Fund's net asset value.
The Global Fund and the Convertible Fund rely on the manager's judgment,
analysis and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the manager takes into consideration, among other things, the
issuer's financial resources, its sensitivity to economic conditions and trends,
its operating history, the quality of the issuer's management and regulatory
matters.
The tables below show the percentage of the Global Fund's and the Convertible
Fund's assets invested in securities rated by S&P or Moody's in the rating
categories shown. A credit rating by a rating agency evaluates the safety of
principal and interest based on an evaluation of the security's credit quality,
but does not consider the market risk or the risk of fluctuation in the price of
the security. The information shown is based on a dollar-weighted average of
each fund's portfolio composition based on month-end assets for each of the 12
months in the fiscal year ended October 31, 1998.
GLOBAL FUND
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
- -------------------------------------------------------------------
AAA 80.0%
BB+ 0.5%
BB 10.7%
BB- 4.9%
B+ 2.7%
B 1 2.4%
CCC+ 0.8%
1. 0.7% are unrated and have been included in the B rating
category.
CONVERTIBLE FUND
AVERAGE WEIGHTED
MOODY'S RATING PERCENTAGE OF ASSETS
- -------------------------------------------------------------------
Aaa 0.46%
Aa 1 1.29%
A 2 11.02%
Baa 22.72%
Ba 3 17.74%
B 4 27.98%
Caa 1.77%
1. 0.59% are unrated and have been included in the Aa rating
category.
2. 1.76% are unrated and have been included in the A rating category.
3. 2.84% are unrated and have been included in the Ba rating category.
4. 12.38% are unrated and have been included in the B rating category.
NON-DIVERSIFICATION RISK Because the Global Fund is non-diversified, there is no
restriction on the percentage of its assets that it may invest at any time in
the securities of any issuer. Nevertheless, the Global Fund's non-diversified
status may expose it to greater risk or volatility than diversified funds with
otherwise similar investment policies, since the fund may invest a larger
portion of its assets in securities of a small number of issuers.
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in depositary receipts also involve some or all of
the risks described below.
There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization of assets, confiscatory or punitive taxation,
withholding and other foreign taxes on income or other amounts, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), restrictions on removal of assets, political or social
instability, or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its net asset value.
Certain countries' financial markets and services are less developed than those
in the U.S. or other major economies. In many foreign countries there is less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The funds may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S.
courts.
A fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict the fund's
investment opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (viii) foreign taxation; (ix)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (x)
the absence of a capital market structure or market-oriented economy; and (xi)
the possibility that recent favorable economic developments may be slowed or
reversed by unanticipated political or social events.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
CURRENCY The funds' management endeavors to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) may be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Some countries may adopt policies that would prevent a fund from transferring
cash out of the country or withhold portions of interest and dividends at the
source.
The funds may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. The funds'
manager endeavors to avoid unfavorable consequences and to take advantage of
favorable developments in particular nations where, from time to time, it places
the fund's investments.
Any investments by the funds in foreign securities where delivery takes place
outside the U.S. will be made in compliance with applicable U.S. and foreign
currency restrictions and other tax laws and laws limiting the amount and types
of foreign investments. Although current regulations do not, in the opinion of
the funds' manager, limit seriously the funds' investment activities, if they
were changed in the future they might restrict the ability of a fund to make its
investments or tend to impair the liquidity of the fund's investments. Changes
in governmental administrations, economic or monetary policies in the U.S. or
abroad, or circumstances in dealings between nations could result in investment
losses for the funds and could adversely affect the funds' operations.
The funds' Board considers at least annually the likelihood of the imposition by
any foreign government of exchange control restrictions that would affect the
liquidity of the funds' assets maintained with custodians in foreign countries,
as well as the degree of risk from political acts of foreign governments to
which such assets may be exposed. The Board also considers the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories. However, in the absence of willful misfeasance, bad
faith, or gross negligence on the part of the funds' manager, any losses
resulting from the holding of a fund's portfolio securities in foreign countries
and/or with securities depositories will be at the risk of the shareholders. No
assurance can be given that the Board's appraisal of the risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.
The Global Fund may invest in debt securities denominated in U.S. and foreign
currencies. A change in the value of any foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Global Fund's assets denominated in the foreign currency. These changes will
also affect the Global Fund's yield, income, and distributions to shareholders.
In addition, although the Global Fund receives income in various currencies, the
fund is required to compute and distribute its income in U.S. dollars.
Therefore, if the exchange rate for any currency depreciates after the Global
Fund's income has been accrued and translated into U.S. dollars, the fund could
be required to liquidate portfolio securities to make its distributions.
Similarly, if an exchange rate depreciates between the time the Global Fund
incurs expenses in U.S. dollars and the time the expenses are paid, the amount
of a currency required to be converted into U.S. dollars in order to pay such
expenses in U.S. dollars will be greater than the equivalent amount in any such
currency at the time the expenses were incurred. The Global Fund will only
invest in foreign currency denominated debt securities of countries whose
currency is fully exchangeable into U.S. dollars without legal restriction at
the time of investment.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
DEBT SECURITIES Debt securities are subject to the risk of an issuer's inability
to meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to factors such as interest rate
sensitivity, market perception of the creditworthiness of the issuer, and
general market liquidity (market risk). The manager considers both credit risk
and market risk in making investment decisions as to corporate debt obligations.
Debt obligations will tend to decrease in value when prevailing interest rates
rise and increase in value when prevailing interest rates fall. Generally,
long-term debt obligations are more sensitive to interest rate fluctuations than
short-term obligations. Because investments in debt obligations are interest
rate sensitive, a fund's performance may be affected by the manager's ability to
anticipate and respond to fluctuations in market interest rates, to the extent
of the fund's investment in debt obligations.
REITS An investment in REITs includes the possibility of a decline in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants, and increases in interest rates. The value of securities
of companies that service the real industry will also be affected by these
risks.
In addition, equity REITs are affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs are affected by the quality
of the properties to which they have extended credit. Equity and mortgage REITs
are dependent upon the REIT's management skill. REITs may not be diversified and
are subject to the risks of financing projects.
FINANCIAL SERVICES COMPANIES Because the Equity Fund invests in stocks of
financial services companies, the fund's investments and performance will be
affected by general market and economic conditions as well as other risk factors
particular to the financial services industry. Financial services companies are
subject to extensive government regulation. This regulation may limit both the
amount and types of loans and other financial commitments a financial services
company can make, and the interest rates and fees it can charge. Such
limitations may have a significant impact on the profitability of a financial
services company since that profitability is attributable, at least in part, to
the company's ability to make financial commitments such as loans. Profitability
of a financial services company is largely dependent upon the availability and
cost of the company's funds, and can fluctuate significantly when interest rates
change. The financial difficulties of borrowers can negatively impact the
industry to the extent that borrowers may not be able to repay loans made by
financial services companies.
Insurance companies may be subject to severe price competition, claims activity,
marketing competition and general economic conditions. Particular insurance
lines will also be influenced by specific matters. Property and casualty insurer
profits may be affected by certain weather catastrophes and other disasters.
Life and health insurer profits may be affected by mortality risks and morbidity
rates. Individual insurance companies may be subject to material risks including
inadequate reserve funds to pay claims and the inability to collect from the
insurance companies which insure insurance companies, so-called reinsurance
carriers.
Congress is currently considering legislation that would reduce the separation
between commercial and investment banking businesses. Commercial banks typically
have been limited to certain non-securities activities such as making loans and
accepting deposits. Investment banks have typically engaged in more extensive
securities activities. If enacted, the proposed legislation could significantly
impact the industry. While banks may be able to expand the services which they
offer if legislation broadening bank powers is enacted, expanded powers could
expose banks to well-established competitors, particularly as the historical
distinctions between banks and other financial institutions erode. In addition,
the financial services industry is an evolving and competitive industry that is
undergoing significant change. Such changes have resulted from various
consolidations as well as the continual development of new products, structures
and a regulatory framework that is anticipated to be subject to further change.
SMALLER COMPANIES From time to time, a number of the convertible securities in
which the Convertible Fund may invest may be issued by smaller companies.
Historically, smaller companies have been more volatile in price than larger
company securities, especially over the short term. Among the reasons for the
greater price volatility are the less certain growth prospects of smaller
companies, the lower degree of liquidity in the markets for such securities, and
the greater sensitivity of smaller companies to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be developing
or marketing new products or services for which markets are not yet established
and may never become established.
OPTIONS ON SECURITIES The writing of covered put options is similar in terms of
risk/return characteristics to buy-and-write transactions. If the market price
of the underlying security rises or otherwise is above the exercise price, the
put option will expire worthless and a fund's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, a fund may elect to close the position or
wait for the option to be exercised and take delivery of the security at the
exercise price. A fund's return will be the premium received from the put option
minus the amount by which the market price of the security is below the exercise
price. The Global Fund may use out-of-the-money, at-the-money, and in-the-money
put options in the same market environments in which it uses call options in
equivalent buy-and-write transactions.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the Global Fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
In regard to the Global Fund's option trading activities, it intends to comply
with the California Corporate Securities Rules as they pertain to prohibited
investments.
A fund's option trading activities may result in the loss of principal under
certain market conditions.
FUTURES CONTRACTS Futures contracts entail certain risks. Although the Global
Fund believes that the use of futures contracts will benefit the fund, if the
manager's investment judgment about the general direction of interest or
currency exchange rates is incorrect, the fund's overall performance would be
poorer than if it had not entered into any such contract. For example, if the
Global Fund has hedged against the possibility of an increase in interest rates
that would adversely affect the price of bonds held in its portfolio and
interest rates decrease instead, the fund will lose part or all of the benefit
of the increased value of the bonds which it has hedged because it will have
offsetting losses in its futures positions. Similarly, if the Global Fund sells
a foreign currency futures contract and the U.S. dollar value of the currency
unexpectedly increases, the fund will lose the beneficial effect of the increase
on the value of the security denominated in that currency. In addition, in such
situations, if the Global Fund has insufficient cash, it may have to sell bonds
from its portfolio to meet daily variation margin requirements. Sales of bonds
may be, but are not necessarily, at increased prices that reflect the rising
market. The Global Fund may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS The amount of risk the Global Fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value of
the option purchased. The Global Fund will purchase a put option on a futures
contract only to hedge the fund's portfolio against the risk of rising interest
rates or the decline in the value of securities denominated in a foreign
currency.
FORWARD CONTRACTS, OPTIONS ON FOREIGN CURRENCIES, AND OPTIONS ON FUTURES
CONTRACTS Forward contracts are not traded on contract markets regulated by the
Commodity Futures Trading Commission (CFTC) or by the SEC. The ability of the
Global Fund to use forward contracts could be restricted to the extent that
Congress authorizes the CFTC or the SEC to regulate such transactions. Forward
contracts are traded through financial institutions acting as market makers.
The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities, and
the effects of other political and economic events.
Futures contracts on currencies, options on futures contracts, and options on
foreign currencies may be traded on foreign exchanges. These transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) less
available data than in the U.S. on which to base trading decisions, (iii) delays
in the Global Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of exercise
and settlement terms and procedures, and margin requirements different from
those in the U.S., and (v) lesser trading volume.
OFFICERS AND TRUSTEES
- -------------------------------------------------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The affiliations of the officers and board members and their principal
occupations for the past five years are shown below.
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
- ---------------------------------------------------------------------------
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 27 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee, as
the case may be, of 51 of the investment companies in the Franklin Templeton
Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W.
Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and H.J.
Heinz Company (processed foods and allied products) (1994-present); director or
trustee, as the case may be, of 25 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and Trustee
(1993-1997), National Child Research Center, Assistant to the President of the
United States and Secretary of the Cabinet (1990-1993), General Counsel to the
United States Treasury Department (1989-1990), and Counselor to the Secretary
and Assistant Secretary for Public Affairs and Public Liaison - United States
Treasury Department (1988-1989).
*Edward B. Jamieson (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
PRESIDENT
AND TRUSTEE
Executive Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and trustee of four of the investment companies in the Franklin
Templeton Group of Funds.
*Charles B. Johnson (66)
777 Mariners Island Blvd.
San Mateo, CA 94404
CHAIRMAN
OF THE BOARD
AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc. and Franklin Templeton Services, Inc.; officer and/or director or trustee,
as the case may be, of most of the other subsidiaries of Franklin Resources,
Inc. and of 50 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (58)
77 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President and
Director, Franklin Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Director, Quarterdeck Corporation (software
firm) and Digital Transmission Systems, Inc. (wireless communications); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, Fischer Imaging
Corporation (medical imaging systems) and General Partner, Peregrine Associates,
which was the General Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
*Harmon E. Burns (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc.,
Franklin Templeton Distributors, Inc. and Franklin Templeton
Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin Investment Advisory Services, Inc. and
Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other
subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
AND CHIEF
FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive Vice
President, Chief Operating Officer and Director, Templeton Investment Counsel,
Inc.; Executive Vice President and Chief Financial Officer, Franklin Advisers,
Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and Franklin
Investment Advisory Services, Inc.; President and Director, Franklin Templeton
Services, Inc.; officer and/or director of some of the other subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of 53 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc. and Franklin Mutual Advisers, Inc.;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 54 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment Counsel,
Inc.; Vice President, Franklin Advisers, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 34 of the investment companies in
the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd.
San Mateo, CA 94404
TREASURER AND
PRINCIPAL
ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers
and the father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $625 per month plus $600 per meeting
attended. Board members who serve on the audit committee of the trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
TOTAL FEES NUMBER OF BOARDS
TOTAL FEES RECEIVED FROM IN THE FRANKLIN
RECEIVED THE FRANKLIN TEMPLETON GROUP
FROM THE TEMPLETON OF FUNDS ON WHICH
NAME TRUST 1 GROUP OF FUNDS 2 EACH SERVES 3
- ---------------------------------------------------------------------------
Frank H. Abbott, III $17,410 $159,051 27
Harris J. Ashton 17,264 361,157 49
S. Joseph Fortunato 16,946 367,835 51
Edith E. Holiday 12,925 211,400 25
Frank W. T. LaHaye 18,010 163,753 27
Gordon S. Macklin 17,264 361,157 49
1. For the fiscal year ended October 31, 1998. During the period from October
31, 1997, through May 31, 1998, fees at the rate of $925 per month plus $925 per
board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 54 registered investment companies, with approximately 164 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin
Advisers, Inc. The manager is wholly owned by Franklin Resources,
Inc. (Resources), a publicly owned company engaged in the
financial services industry through its subsidiaries. Charles B.
Johnson and Rupert H. Johnson, Jr. are the principal shareholders
of Resources.
The manager provides investment research and portfolio management services, and
selects the securities for the funds to buy, hold or sell. The manager also
selects the brokers who execute the funds' portfolio transactions. The manager
provides periodic reports to the board, which reviews and supervises the
manager's investment activities. To protect the funds, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the funds. Similarly, with respect to the
funds, the manager is not obligated to recommend, buy or sell, or to refrain
from recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the funds or other
funds it manages. Of course, any transactions for the accounts of the manager
and other access persons will be made in compliance with the fund's code of
ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group who
are access persons may engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed by the close
of the business day following the day clearance is granted; (ii) copies of all
brokerage confirmations and statements must be sent to a compliance officer;
(iii) all brokerage accounts must be disclosed on an annual basis; and (iv)
access persons involved in preparing and making investment decisions must, in
addition to (i), (ii) and (iii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
The Global Fund's sub-advisor is Templeton Investment Counsel, Inc., through its
Global Bond Managers division. The sub-advisor has an agreement with the manager
and provides the manager with investment management advice and assistance. The
sub-advisor furnishes, subject to the manager's discretion, a portion of the
investment advisory services for which the manager is responsible pursuant to
the management agreement. These responsibilities may include managing a portion
of the Global Fund's investments and supplying research services. The
sub-advisor's activities are subject to the board's review and control, as well
as the manager's instruction and supervision.
MANAGEMENT FEES Each fund pays the manager a fee equal to a monthly rate of:
o 5/96% of 1% of the value of net assets up to and including $100
million;
o 1/24 of 1% of the value of net assets over $100 million and not
over $250 million; and
o 9/240 of 1% of the value of net assets in excess of $250
million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a fund's
shares pays its proportionate share of the fee.
For the last three fiscal years ended October 31, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
-----------------------------------------
1998 1997 1996
-----------------------------------------
Convertible Fund 1,377,487 1,075,628 699,454
Equity Fund 2,419,689 1,783,336 1,251,297
Global Fund 722,502 785,629 866,730
Short- Intermediate Fund 1,118,373 1,076,296 1,142,250
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.35% of the average monthly net assets up to and including
$100 million;
o 0.25% of the average monthly net assets over $100 million and
not over $250 million; and
o 0.20% of the average monthly net assets in excess of $250
million.
The manager pays this fee from the management fees it receives from the Global
Fund. For the last three fiscal years ended October 31, the manager paid the
following sub-advisory fees:
- -------------------------------------------------------------------
SUB-ADVISORY FEES PAID ($)
- -------------------------------------------------------------------
1998 397,509
1997 428,496
1996 473,601
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the funds. FT Services is wholly owned by Resources
and is an affiliate of the funds' manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of each fund's average daily net assets up to $200
million;
o 0.135% of average daily net assets over $200 million up to $700
million;
o 0.10% of average daily net assets over $700 million up to $1.2
billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last two fiscal years ended October 31, the manager paid FT Services
the following administration fees:
ADMINISTRATION
FEES PAID ($)
- ----------------------------------------------------------------------
1998 1997
--------------------------------------
Convertible Fund 369,613 297,444
Equity Fund 678,739 514,630
Global Fund 179,253 215,869
Short-Intermediate Fund 296,460 310,121
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the funds' shareholder servicing agent and acts as
the funds' transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
For its services, Investor Services receives a fixed fee per account. The funds
may also reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the funds. The amount of reimbursements
for these services per benefit plan participant fund account per year may not
exceed the per account fee payable by the funds to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the funds' independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------
The manager selects brokers and dealers to execute the Convertible Fund's and
the Equity Fund's portfolio transactions in accordance with criteria set forth
in the management agreement and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit a fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
Since most purchases by the Global Fund and the Short-Intermediate Fund are
principal transactions at net prices, the funds incur little or no brokerage
costs. The funds deal directly with the selling or buying principal or market
maker without incurring charges for the services of a broker on its behalf,
unless it is determined that a better price or execution may be obtained by
using the services of a broker. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask prices. The funds seek to obtain prompt execution of orders at the most
favorable net price. Transactions may be directed to dealers in return for
research and statistical information, as well as for special services provided
by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the funds'
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of the fund, any portfolio
securities tendered by the fund will be tendered through Distributors if it is
legally permissible to do so. In turn, the next management fee payable to the
manager will be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended October 31, the Convertible Fund and
the Equity Fund paid the following brokerage commissions:
BROKERAGE COMMISSIONS ($)
---------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
Convertible Fund 107,591 147,042 84,758
Equity Fund 453,051 401,820 293,423
During the same periods, the Global Fund and the Short Intermediate Fund did not
pay any brokerage commissions.
As of October 31, 1998, the Global Fund and the Short-Intermediate Fund did not
own securities of their regular broker-dealers. As of the same date, the
Convertible Fund owned securities issued by Salomon Smith Barney Holdings, Inc.
valued in the aggregate at $1,481,250, and the Equity Fund owned securities
issued by J.P. Morgan & Co., Inc. valued in the aggregate at $3,581,500. Except
as noted, the Convertible Fund and the Equity Fund did not own any securities
issued by their regular broker-dealers as of the end of the fiscal year.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
The funds do not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes a fund's net investment
income from which dividends may be paid to you. Any distributions by a fund from
such income will be taxable to you as ordinary income, whether you take them in
cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS A fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by a fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
funds. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by the fund. These gains
when distributed will be taxable to you as ordinary dividends, and any losses
will reduce the fund's ordinary income otherwise available for distribution to
you. This treatment could increase or reduce a fund's ordinary income
distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
The Global Fund may be subject to foreign withholding taxes on income from
certain of its foreign securities. If more than 50% of the fund's total assets
at the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share of
foreign taxes paid by the fund. If this election is made, the year-end statement
you receive from the fund will show more taxable income than was actually
distributed to you. However, you will be entitled to either deduct your share of
such taxes in computing your taxable income or (subject to limitations) claim a
foreign tax credit for such taxes against your U.S. federal income tax. The fund
will provide you with the information necessary to complete your individual
income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of their tax status for federal
income tax purposes shortly after the close of each calendar year. If you have
not held fund shares for a full year, the fund may designate and distribute to
you, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
each fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of a fund as a regulated investment company if it determines such
course of action to be beneficial to shareholders. In such case, the fund will
be subject to federal, and possibly state, corporate taxes on its taxable income
and gains, and distributions to you will be taxed as ordinary dividend income to
the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. Each fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your fund
shares will be disallowed to the extent that you buy other shares in the fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and then
reinvest the sales proceeds in the fund or in another Franklin Templeton Fund
within 90 days of buying the original shares, the sales charge that would
otherwise apply to your reinvestment may be reduced or eliminated. The IRS will
require you to report gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends paid
to you from interest earned on direct obligations of the U.S. government,
subject in some states to minimum investment requirements that must be met by
the funds. Investments in Government National Mortgage Association or Federal
National Mortgage Association securities, bankers' acceptances, commercial paper
and repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS Because the Global Fund's and the
Short-Intermediate Fund's income consists of interest rather than dividends, no
portion of their distributions will generally be eligible for the intercorporate
dividends-received deduction. None of the dividends paid by the funds for the
most recent calendar year qualified for such deduction, and it is anticipated
that none of the current year's dividends will so qualify.
If you are a corporate shareholder, you should note that 17.37% of the dividends
paid by the Convertible Fund and 61.90% of the dividends paid by the Equity Fund
for the most recent fiscal year qualified for the dividends-received deduction.
In some circumstances, you will be allowed to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with respect
to dividends designated by a fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by a fund are
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS
AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------
The Global Fund is a nondiversified series, and each other fund is a diversified
series of Franklin Investors Securities Trust, an open-end management investment
company, commonly called a mutual fund. The trust was organized as a
Massachusetts business trust on December 22, 1986, and is registered with the
SEC.
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the funds. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of a
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that a fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that each fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of a fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Convertible Fund currently offers two classes of shares, Class A and Class
C. The Equity Fund currently offers three classes of shares, Class A, Class B,
and Class C. The Global Fund currently offers three classes of shares, Class A,
Class C and Advisor Class. The Short-Intermediate Fund currently offers two
classes of shares, Class A and Advisor Class. Before January 1, 1999, Class A
shares were designated Class I and Class C shares were designated Class II. The
Equity Fund began offering Class B shares on January 1, 1999. Each fund may
offer additional classes of shares in the future. The full title of each class
is:
o Franklin Convertible Securities Fund - Class A
o Franklin Convertible Securities Fund - Class C
o Franklin Equity Income Fund - Class A
o Franklin Equity Income Fund - Class B
o Franklin Equity Income Fund - Class C
o Franklin Global Government Income Fund - Class A
o Franklin Global Government Income Fund - Class C
o Franklin Global Government Income Fund - Advisor Class
o Franklin Short-Intermediate U.S. Government Securities Fund - Class A
o Franklin Short-Intermediate U.S. Government Securities Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets. On
matters that affect a fund as a whole, each class has the same voting and other
rights and preferences as any other class. On matters that affect only one
class, only shareholders of that class may vote. Each class votes separately on
matters affecting only that class, or expressly required to be voted on
separately by state or federal law. Shares of each class of a series have the
same voting and other rights and preferences as the other classes and series of
the trust for matters that affect the trust as a whole. Additional series may be
offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a board
member. A special meeting may also be called by the board in its discretion.
As of December 7, 1998, the principal shareholders of the funds, beneficial or
of record, were:
SHARE PERCENTAGE
NAME AND ADDRESS CLASS (%)
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GLOBAL FUND
Franklin Templeton
Trust Company 1
As Trustee for ValuSelect
Attn: Trading
P.O. Box 2438
Rancho Cordova,
CA 95741-2438 Advisor 77.39
SHORT-INTERMEDIATE FUND
City of Scottsdale
Attn: Mark Kochman
3939 Civic Center Blvd.
Scottsdale, AZ 85251-4433 A 11.66
Templeton Funds
Trust Company 2
Attn: Vickie Nuzzo
100 Fountain Pky.
St. Petersburg,
FL 33716-1205 Advisor 62.11
Franklin Templeton
Trust Company 1
Trust Services FBO
Harris J. Ashton IRA R/O
P.O. Box 7519
San Mateo, CA 94403-7519 Advisor 28.47
1. Franklin Templeton Trust Company is a California corporation and is wholly
owned by Franklin Resources, Inc.
2. Templeton Funds Trust Company is a Florida corporation and is wholly owned by
Franklin Resources, Inc.
From time to time, the number of fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Convertible Fund and the Equity Fund, no other person
holds beneficially or of record more than 5% of the outstanding shares of any
class.
As of December 7, 1998, the officers and board members, as a group, owned of
record and beneficially 28% of the Short-Intermediate Fund - Advisor Class and
less than 1% of the outstanding shares of the other funds and classes. The board
members may own shares in other funds in the Franklin Templeton Group of Funds.
BUYING AND SELLING SHARES
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Each fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with a fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the funds may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of a fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of a fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be
purchased at the net asset value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for the
Convertible Fund - Class A and the Equity Fund - Class A, 4.25% for the Global
Fund - Class A and 2.25% for the Short-Intermediate Fund - Class A, and 1% for
the Convertible Fund - Class C, the Equity Fund - Class C, and the Global Fund
Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of the
lower sales charges for large purchases. The Franklin Templeton Funds include
the U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You may also combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you may also add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares until
you complete the LOI or pay the higher sales charge.
After you file your LOI with a fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI may also qualify for a retroactive reduction in the sales charge. If you
file your LOI with a fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group
members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk
transmission of investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions, although any such plan that purchased a fund's Class A
shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin
Templeton Fund. The distributions generally must be reinvested
in the same share class. Certain exceptions apply, however, to
Class C shareholders who chose to reinvest their distributions
in Class A shares of a fund before November 17, 1997, and to
Advisor Class or Class Z shareholders of a Franklin Templeton
Fund who may reinvest their distributions in a fund's Class A
shares. This waiver category also applies to Class B and C
shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death benefit
proceeds, if the annuity contract offers as an investment option the Franklin
Valuemark Funds or the Templeton Variable Products Series Fund. You should
contact your tax advisor for information on any tax consequences that may
apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton Global
Strategy Fund, a new CDSC will apply to your purchase of fund shares and the
CDSC holding period will begin again. We will, however, credit your fund account
with additional shares based on the CDSC you previously paid and the amount of
the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton money
fund, you may reinvest them as described above. The proceeds must be reinvested
within 365 days from the date they are redeemed from the money fund.
o Distributions from an existing retirement plan invested in the
Franklin Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares may also be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which the
trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following the
order.
o Any state or local government or any instrumentality, department, authority or
agency thereof that has determined a fund is a legally permissible investment
and that can only buy fund shares without paying sales charges. Please consult
your legal and investment advisors to determine if an investment in a fund is
permissible and suitable for you and the effect, if any, of payments by the
fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial planners
who have entered into an agreement with Distributors for clients participating
in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their
investment accounts only
o Current employees of securities dealers and their affiliates and their family
members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual Series
Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series Fund on October 31, 1996,
or who sold his or her shares of Mutual Series Class Z within the past 365
days
o Investment companies exchanging shares or selling assets
pursuant to a merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described
under "Retirement plans" below
In addition, Class C shares may be purchased without an initial sales charge by
any investor who buys Class C shares through an omnibus account with Merrill
Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are
sold within 18 months of purchase.
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the Internal
Revenue Code, including 401(k), money purchase pension, profit sharing and
defined benefit plans), SIMPLEs (savings incentive match plans for employees) or
SEPs (employer sponsored simplified employee pension plans established under
section 408(k) of the Internal Revenue Code) must also meet the group purchase
requirements described above to be able to buy Class A shares without an initial
sales charge. We may enter into a special arrangement with a securities dealer,
based on criteria established by the funds, to add together certain small
qualified retirement plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
CONVERTIBLE FUND AND EQUITY FUND
SALES CHARGE
SIZE OF PURCHASE - U.S. DOLLARS (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
GLOBAL FUND AND SHORT-INTERMEDIATE FUND
SALES CHARGE
SIZE OF PURCHASE - U.S. DOLLARS (%)
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Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION Securities dealers may at times receive the entire sales
charge. A securities dealer who receives 90% or more of the sales charge may be
deemed an underwriter under the Securities Act of 1933, as amended. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the dealer compensation table in the funds'
prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of the Convertible Fund or the Equity Fund of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of the Global Fund or the Short-Intermediate Fund of $1 million or more:
0.75% on sales of $1 million to $2 million, plus 0.60% on sales over $2 million
to $3 million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on
sales over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases of Class A shares by certain retirement plans without an initial sales
charge: 1% on sales of $500,000 to $2 million, plus 0.80% on sales over $2
million to $3 million, plus 0.50% on sales over $3 million to $50 million, plus
0.25% on sales over $50 million to $100 million, plus 0.15% on sales over $100
million. Distributors may make these payments in the form of contingent advance
payments, which may be recovered from the securities dealer or set off against
other payments due to the dealer if shares are sold within 12 months of the
calendar month of purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or one of its affiliates,
and the securities dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
securities dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a securities dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a securities dealer's support of, and
participation in, Distributors' marketing programs; a securities dealer's
compensation programs for its registered representatives; and the extent of a
securities dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to securities dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain securities dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the rules of the National Association of Securities Dealers,
Inc.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin Templeton
Funds and are afforded the opportunity to speak with portfolio managers.
Invitation to these meetings is not conditioned on selling a specific number of
shares. Those who have shown an interest in the Franklin Templeton Funds,
however, are more likely to be considered. To the extent permitted by their
firm's policies and procedures, registered representatives' expenses in
attending these meetings may be covered by Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity discount
or letter of intent programs, a CDSC may apply on any shares you sell within 12
months of purchase. For Class C shares, a CDSC may apply if you sell your shares
within 18 months of purchase. The CDSC is 1% of the value of the shares sold or
the net asset value at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge may also be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES THIS % IS DEDUCTED
WITHIN THIS MANY YEARS FROM YOUR PROCEEDS
AFTER BUYING THEM AS A CDSC
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1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class will generally be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997, or
(ii) the securities dealer of record received a payment from Distributors of
0.25% or less, or (iii) Distributors did not make any payment in connection
with the purchase, or (iv) the securities dealer of record has entered into a
supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if Distributors did not make any payment to
the securities dealer of record in connection with the purchase
o Redemptions by a fund when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or
beneficial owner
o Redemptions through a systematic withdrawal plan set up before
February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of
your account's net asset value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for Class
B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable)
from retirement plan accounts
o Participant initiated distributions from employee benefit plans or participant
initiated exchanges among investment choices in employee benefit plans (not
applicable to Class B)
EXCHANGE PRIVILEGE For the Convertible Fund, the Equity Fund and the Global
Fund, if you request the exchange of the total value of your account, declared
but unpaid income dividends and capital gain distributions will be reinvested in
the fund and exchanged into the new fund at net asset value when paid. For the
Short-Intermediate Fund, if you request the exchange of the total value of your
account, accrued but unpaid income dividends and capital gain distributions will
be reinvested in the fund at net asset value on the date of the exchange, and
then the entire share balance will be exchanged into the new fund. Backup
withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
each fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goal exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Once your plan is established, any
distributions paid by the fund will be automatically reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from a fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. Each fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND Each fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The funds do not intend to redeem illiquid
securities in kind. If this happens, however, you may not be able to recover
your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to a fund marked "unable to
forward" by the postal service, we will consider this a request by you to change
your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither a fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither a fund nor its agents shall be liable to you or any other person if, for
any reason, a redemption request by wire is not processed as described in the
prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with a fund on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such owners. For each beneficial owner in the omnibus account, the fund may
reimburse Investor Services an amount not to exceed the per account fee that the
fund normally pays Investor Services. These financial institutions may also
charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to a fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, each fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
- -------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the funds value those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The funds value over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the funds
value them according to the broadest and most representative market as
determined by the manager.
The Global Fund, the Convertible Fund, and the Equity Fund value portfolio
securities underlying actively traded call options at their market price as
determined above. The current market value of any option a fund holds is its
last sale price on the relevant exchange before the fund values its assets. If
there are no sales that day or if the last sale price is outside the bid and ask
prices, a fund values options within the range of the current closing bid and
ask prices if the fund believes the valuation fairly reflects the contract's
market value.
The Convertible Fund and the Equity Fund determine the value of a foreign
security as of the close of trading on the foreign exchange on which the
security is traded or as of the close of trading on the NYSE, if that is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
foreign security is valued within the range of the most recent quoted bid and
ask prices. Occasionally events that affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the exchange and will, therefore, not be reflected in the
computation of the NAV. If events materially affecting the values of these
foreign securities occur during this period, the securities will be valued in
accordance with procedures established by the board.
For the Global Fund, trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally completed well
before the close of business of the NYSE on each day that the NYSE is open.
Trading in European or Far Eastern securities generally, or in a particular
country or countries, may not take place on every NYSE business day.
Furthermore, trading takes place in various foreign markets on days that are not
business days for the NYSE and on which the fund's NAV is not calculated. Thus,
the calculation of the fund's NAV does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
funds may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances to
dealers, and the amounts Distributors received in connection with redemptions or
repurchases of shares for the last three fiscal years ended October 31:
AMOUNT RECEIVED
TOTAL AMOUNT IN CONNECTION
COMMISSIONS RETAINED BY WITH REDEMPTIONS
RECEIVED DISTRIBUTORS AND REPURCHASES
($) ($) ($)
- ----------------------------------------------------------------------
1998
Convertible Fund 1,162,596 108,306 24,871
Equity Fund 1,861,175 180,988 25,388
Global Fund 234,760 13,932 2,369
Short-Intermediate Fund 383,582 50,338 -
1997
Convertible Fund 1,373,166 130,410 8,497
Equity Fund 1,524,045 144,609 13,137
Global Fund 16,188 12,577 3,054
Short-Intermediate Fund 330,666 42,408 -
1996
Convertible Fund 1,132,135 117,440 1,285
Equity Fund 1,819,338 186,833 1,595
Global Fund 27,589 293 813
Short-Intermediate Fund 229,997 29,004 -
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution or
"Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among others,
distribution or service fees paid to securities dealers or others who have
executed a servicing agreement with the fund, Distributors or its affiliates; a
prorated portion of Distributors' overhead expenses; and the expenses of
printing prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based only
on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year for the Convertible Fund and the Equity Fund, 0.15% per year for
the Global Fund, and 0.10% per year for the Short-Intermediate Fund, of Class
A's average daily net assets, payable quarterly. All distribution expenses over
this amount will be borne by those who have incurred them.
In implementing the Class A plan, the board has determined that the annual fees
payable by the Convertible Fund and the Equity Fund under the plan will be equal
to the sum of: (i) the amount obtained by multiplying 0.25% by the average daily
net assets represented by the fund's Class A shares that were acquired by
investors on or after May 1, 1994, the effective date of the plan (new assets),
and (ii) the amount obtained by multiplying 0.15% by the average daily net
assets represented by the fund's Class A shares that were acquired before May 1,
1994 (old assets). The board has determined that the annual fees payable by the
Global Fund under the plan will be equal to the sum of (i) 0.15% of new assets,
and (ii) 0.05% of old assets. The board has determined that the annual fees
payable by the Short-Intermediate Fund under the plan will be equal to the sum
of (i) 0.10% of new assets, and (ii) 0.05% of old assets. These fees will be
paid to the current securities dealer of record on the account. In addition,
until such time as the maximum payment of 0.25% for the Convertible Fund and the
Equity Fund, 0.15% for the Global Fund, and 0.10% for the Short-Intermediate
Fund is reached on a yearly basis, up to an additional 0.05% will be paid by the
Convertible Fund and the Equity Fund, and up to an additional 0.02% will be paid
by the Global Fund and the Short-Intermediate Fund to Distributors under the
plans. The payments made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the plan,
such as advertising.
The fee is a Class A expense. This means that all Class A shareholders,
regardless of when they purchased their shares, will bear Rule 12b-1 expenses at
the same rate. The initial rate will be at least 0.20% (0.15% plus 0.05%) for
the Convertible Fund and the Equity Fund, and 0.07% (0.05% plus 0.02%) for the
Global Fund and the Short-Intermediate Fund, of the average daily net assets of
Class A and, as Class A shares are sold on or after May 1, 1994, will increase
over time. Thus, as the proportion of Class A shares purchased on or after May
1, 1994, increases in relation to outstanding Class A shares, the expenses
attributable to payments under the plan will also increase (but will not exceed
0.25% of average daily net assets for the Convertible Fund and the Equity Fund,
0.15% of average daily net assets for the Global Fund, and 0.10% of average
daily net assets for the Short-Intermediate Fund). While this is the currently
anticipated calculation for fees payable under the Class A plan, the plan
permits the board to allow the fund to pay a full 0.25% on all assets of the
Convertible Fund or the Equity Fund, 0.15% on all assets of the Global Fund, and
0.10% on all assets of the Short-Intermediate Fund at any time. The approval of
the board would be required to change the calculation of the payments to be made
under the Class A plan.
The Class A plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS B (EQUITY FUND ONLY) AND C PLANS. Under the Class B and C plans, the
Convertible Fund and the Equity Fund pay Distributors up to 0.75% per year, and
the Global Fund pays Distributors up to 0.50% per year, of the class's average
daily net assets, payable quarterly, to pay Distributors or others for providing
distribution and related services and bearing certain expenses. All distribution
expenses over this amount will be borne by those who have incurred them. The
Convertible Fund and the Equity Fund may also pay a servicing fee of up to 0.25%
per year, and the Global Fund may also pay a servicing fee of up to 0.15% per
year, of the class's average daily net assets, payable quarterly. This fee may
be used to pay securities dealers or others for, among other things, helping to
establish and maintain customer accounts and records, helping with requests to
buy and sell shares, receiving and answering correspondence, monitoring dividend
payments from the funds on behalf of customers, and similar servicing and
account maintenance activities.
The expenses relating to each of the Class B and C plans are also used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act of
1940, as amended, then such payments shall be deemed to have been made pursuant
to the plan. The terms and provisions of each plan relating to required reports,
term, and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the funds and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the funds' board. The plans and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of the class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the noninterested board
members, cast in person at a meeting called for the purpose of voting on any
such amendment.
Distributors is required to report in writing to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the board with such other information as may
reasonably be requested in order to enable the board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended October 31, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the funds paid Distributors under the
plans were:
DISTRIBUTORS' AMOUNT PAID
ELIGIBLE EXPENSES ($) BY THE FUND ($)
- ----------------------------------------------------------------------
Convertible Fund - Class A 860,537 515,494
Convertible Fund - Class C 610,818 451,619
Equity Fund - Class A 1,518,121 1,030,358
Equity Fund - Class C 982,721 683,995
Global Fund - Class A 321,321 125,026
Global Fund - Class C 113,020 34,970
Short-Intermediate - Class A 575,945 175,727
PERFORMANCE
- -------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the funds are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the funds to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations, you should keep in
mind that the maximum initial sales charge reflected in each quotation is a one
time fee charged on all direct purchases, which will have its greatest impact
during the early stages of your investment. This charge will affect actual
performance less the longer you retain your investment in a fund. The average
annual total returns for the indicated periods ended October 31, 1998, were:
CLASS A 1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Convertible Fund -15.12% 7.38% 10.75%
Equity Fund 4.57% 11.80% 12.90%
Global Fund 1.12% 4.59% 7.20%
Short-Intermediate Fund 4.94% 4.49% 6.79%
SINCE INCEPTION
CLASS C 1 YEAR INCEPTION DATE
- ----------------------------------------------------------------------
Convertible Fund -12.30% 6.72% 10/2/95
Equity Fund 8.10% 14.85% 10/2/95
Global Fund 3.14% 7.40% 5/1/95
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. Cumulative total return, however, is based on the
actual return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated periods
ended October 31, 1998, were:
CLASS A 1 YEAR 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
Convertible Fund -15.12% 42.79% 177.61%
Equity Fund 4.57% 74.63% 236.33%
Global Fund 1.12% 25.68% 92.50%
Short-Intermediate Fund 4.94% 24.56% 92.89%
SINCE INCEPTION
CLASS C 1 YEAR INCEPTION DATE
- ----------------------------------------------------------------------
Convertible Fund -12.30% 22.17% 10/2/95
Equity Fund 8.10% 53.16% 10/2/95
Global Fund 3.14% 29.68% 5/1/95
CURRENT YIELD Current yield shows the income per share earned by a fund. It is
calculated by dividing the net investment income per share earned during a
30-day base period by the applicable maximum offering price per share on the
last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders of the class during the base
period. The yields for the 30-day period ended October 31, 1998, were:
CLASS A CLASS C
- ----------------------------------------------------------------------
Convertible Fund 5.67% 5.23%
Equity Fund 3.11% 2.54%
Global Fund 5.31% 4.96%
Short-Intermediate Fund 3.73% N/A
These figures were obtained using the following SEC formula:
6
Yield = 2 [(a-b + 1) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate. The current distribution rate is usually
computed by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum offering price. The
current distribution rate differs from the current yield computation because it
may include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rates for the 30-day period ended October 31, 1998, were:
CLASS A CLASS C
- ----------------------------------------------------------------------
Convertible Fund 4.81% 4.36%
Equity Fund 2.95% 2.43%
Global Fund 6.96% 6.69%
Short-Intermediate Fund 5.05% N/A
VOLATILITY Occasionally statistics may be used to show a fund's volatility or
risk. Measures of volatility or risk are generally used to compare a fund's net
asset value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of net asset value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS The funds may also quote the performance of shares
without a sales charge. Sales literature and advertising may quote a cumulative
total return, average annual total return and other measures of performance with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of a fund as a potential investment for
IRAs, business retirement plans, and other tax-advantaged retirement plans may
quote a total return based upon compounding of dividends on which it is presumed
no federal income tax applies.
Each fund may include in its advertising or sales material information relating
to investment goals and performance results of funds belonging to the Franklin
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
o Dow Jones(R) Composite Average and its component averages - a price-weighted
average of 65 stocks that trade on the New York Stock Exchange. The average is
a combination of the Dow Jones Industrial Average (30 blue-chip stocks that
are generally leaders in their industry), the Dow Jones Transportation Average
(20 transportation stocks), and the Dow Jones Utilities Average (15 utility
stocks involved in the production of electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions, exclusive
of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. -
analyzes price, yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS
WEEK, CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Salomon Brothers Broad Bond Index or its component indices measures yield,
price and total return for Treasury, agency, corporate and mortgage bonds.
o Savings and Loan Historical Interest Rates - as published in
the U.S. Savings & Loan League Fact Book.
o Lehman Brothers Aggregate Bond Index or its component indices measures yield,
price and total return for Treasury, agency, corporate, mortgage and Yankee
bonds.
o Historical data supplied by the research departments of CS
First Boston Corporation, the J. P. Morgan companies, Salomon
Brothers, Merrill Lynch, Lehman Brothers and Bloomberg L.P.
o Yields and total return of other taxable investments including CDs, money
market deposit accounts, checking accounts, savings accounts, money market
mutual funds, and repurchase agreements.
o Yields of other countries' government and corporate bonds as compared to U.S.
government and corporate bonds to illustrate the potentially higher returns
available outside the United States.
o IBC's Money Fund Report - industry averages for seven-day annualized and
compounded yields of taxable, tax-free, and government money funds.
o Salomon Brothers World Government Bond Index, or its component indices. The
World Government Bond Index covers the available market for domestic
government bonds worldwide. It includes all fixed-rate bonds with a remaining
maturity of one year or longer with amounts outstanding of at least the
equivalent of $25 million dollars. The index provides an accurate, replicable
fixed-income benchmark for market performance. Returns are in local currency.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over
specified time periods relative to other funds within its category.
From time to time, advertisements or information for a fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare a fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in a fund involves the risk of fluctuation of
principal value, a risk generally not present in an investment in a CD issued by
a bank. For example, as the general level of interest rates rise, the value of a
fund's fixed-income investments, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of a fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in a fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that a fund will continue its performance as compared
to these other averages.
MISCELLANEOUS INFORMATION
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The funds may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in a fund
cannot guarantee that these goals will be met.
Each fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $220 billion in assets under management for more than 7 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 115 U.S. based open-end investment companies to the public. Each
fund may identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the New
York Stock Exchange. While many of them have similar investment goals, no two
are exactly alike. Shares of the funds are generally sold through securities
dealers, whose investment representatives are experienced professionals who can
offer advice on the type of investments suitable to your unique goals and needs,
as well as the risks associated with such investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has already
begun making necessary software changes to help the computer systems that
service the funds and their shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues to
seek reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis. Resources is
also beginning to develop a contingency plan, including identification of those
mission critical systems for which it is practical to develop a contingency
plan. However, in an operation as complex and geographically distributed as
Resources' business, the alternatives to use of normal systems, especially
mission critical systems, or supplies of electricity or long distance voice and
data lines are limited.
DESCRIPTION OF BOND RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present that make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S CORPORATION (S&P)
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
